Sales Discounts, Returns and Gift Cards are all a fact of life with a lot of small businesses. Even the most simple bookkeeping system needs to have a way to reflect these items.
I’ve worked with manufacturers and retail businesses, and you just have to accept that some merchandise is going to be brought back to you, either because of a defect or just a change of mind on the customer’s part. Even in a service business, a customer may change their mind on you, and cancel your services. And a lot of businesses are now using Gift Cards, too.
So how do you reflect Sales Discounts, Returns and Gift Cards in your simple bookkeeping system?
Let’s go thru each one and take a closer look.
The first item in this section on Sales Discounts, Returns and Gift Cards is Sales Discounts. Discounts are reductions to the sales price of an item. It could be for paying within a certain time frame, buying a discontinued product, etc.
For example, let’s say we give a 2% discount for paying an invoice in 10 days. In other words, you’re willing to lose 2% of the invoice amount to get your money quicker, and have less of a chance of having a past due or potentially noncollectable account. This also helps the customer, especially if the invoice amount is rather large.
You want to recognize the entire Sales amount as revenue, then deduct the Sales Discount from it.
Debit: Checking Account $90.00
Debit: Sales Discount $10.00
Credit:Sales Account $100.00
The second item in the category of Sales Discounts, Returns and Gift Cards is Sales Returns.
In accounting class we called these Returns & Allowances. The Allowances part reflects the process of large retail establishments in estimating an allowance of a certain percentage of sales that would be returned, and booking that right up front. Let’s say a large store had sales of $100,000 this month. They would automatically book like 2% of that amount as Sales Returns. Then at the end of the month, they would adjust the Sales Returns account to the actual amount of returns.
In a simple bookkeeping system for a small business, however, just reporting the returns as they occur should suffice.
Let’s say a customer returned a vase to your pottery store. Maybe when they got home they realized it clashed with their drapes (or whatever).
Debit: Sales Returns $50.00
Credit: Checking Account $50.00
On your Income Statement, Sales Discounts and Returns would be deducted from your Sales, and called Net Sales.
This brings us to the last installment in this category of Sales Discounts, Returns and Gift Cards.
Not just for the big guys anymore, lots of small businesses use Gift Cards to reward regular customers, and to bring in new customers and increase business.
According to what I’ve been reading lately in the Accounting World, this seems to be an area without direct guidance from FASB – the Federal Accounting Standards Board.
Simple bookkeeping thought tells us a Gift Card is a lot like a Sales Discount, except you never know when, if ever, the Sale will occur.
But I did find some guidance in an article in The CPA Journal. So here’s the skinny on accounting for Gift Cards.
When a customer buys a Gift Card, you record the cash received, and post a liability for that unearned revenue.
When the customer uses the Gift Card, your record the Sale, and decrease your liability, as you’ve paid the customer, as it were.
What if they’re not used right away?
If the cards have an expiration date, and are never used, you can recognize the income (Sale) at the time they expire. However, check with your state as you may have to report that money as unclaimed property.
If the cards do not expire, it seems like you may be carrying that liability on your books forever. It’s estimated that 10% of Gift Cards are never used. Be sure to check with your state’s unclaimed property laws about this first. If there are none, try to estimate the life expectancy of your Gift Cards.
Track the usage, and develop some numbers. For example, maybe 80% of cards are used within 2 months, another 10% used by 6 months, another 5% used within the year, and the last 5% never used.
Document that, and use it as your reasoning to recognize revenue on that last 5% of the value of your Gift Cards sold after a year, instead of leaving that liability on your books forever.
Recording the sale of the Gift Card and the corresponding unearned revenue:
Debit: Cash Received $50
Credit: Gift Card Unearned Revenue $50
Recording the usage of the Gift Card:
Debit: Gift Card Unearned Revenue $50
Credit: Gift Card Sales $50
So, in summary, Sales Discounts, Returns and Gift Cards is of importance to all small businesses. Sales Discounts and Returns are decreases to Sales, and are posted separately from the Sales Amount. Gift Cards, on the other hand, are different from Sales Discounts and Returns, because they are booked as a liability, then when used, booked as a Sale.