Question

Will sales revenue & cost of sales increase and unearned revenue decrease when the gift card is expired? However, there won’t be any inventory movement?

Answer 1

Accounting for gift cards from starting till the end is explained below :

1. When gift card is sold for cash : This event gives rise to a liability and not revenue since the company now becomes obligated to perform services / sell goods to the customer at a later date whenever the gift card is redeemed. Hence entry passed for same is as follows :

Cash/Bank a/c ...Dr

To Unearned/Deferred Revenue a/c

2. Now after gift card has been sold, 2 scenarios are possible : a) Gift card is redeemed b) Gift card is not redeemed and it expires (this is the scenario asked in the question). In both cases since the liability of company to provide services is extinguished, it is now possible for the company to record revenue and the entry passed for the same is as below :

Unearned/Deferred Revenue a/c ...Dr

To Revenue A/c

It may also be noted that when the gift card expires, there is no movement on the cost of sales & neither on the inventory. Only liability for unearned revenue is extinguished and actual revenue is recognized.