Gift Cards

Setting up Gift Cards Liability Account in Xero

If you already have a liability account for gift cards in Xero, you may skip this step and go straight to setting up the Gift Card liability account in Post to Xero in the next section.

Create a liability account to store the sale of gift cards to customers. To set up a liability account, go to Settings > Chart of Accounts > Liabilities tab > Add account. Create a new account with the following settings:

• Account Type - Liability
• Account Number - assign an identification number to this account
• Account Name - Gift Cards Payable
• Tax - BAS Excluded
• Check “Show on Dashboard Watchlist” (optional)
• Check “Enable payments to this account”
• Click “Save”

Note: For countries other than Australia, check your local accounting standards for the Tax setting to use for gift card liability accounts.

Setting up Gift Cards Liability Account in Post to Xero

Go to Setup - Xero. In the Default Settings > Gift Cards Liability Account dropdown, select the Xero account to use for the gift cards:

Definition of Gift Cards

Gift cards (and gift certificates) are often sold by a retailer to a buyer for cash. The buyer can then redeem the gift certificate or give it to another person who can redeem the gift certificate for merchandise or services.

Accounting for the Sale of Gift Cards

The sale of a gift card should be recorded with a debit to Cash and a credit to a liability account such as Gift Cards Payable.

Note that revenue is not recorded at this point. Rather, the retailer is recording its obligation/liability to provide merchandise or services for the amount of the certificate sold.

Accounting for the Redemption of a Gift Card

When a gift card is presented to the retailer, revenue will be recorded by the retailer for the amount of merchandise or services that were provided. This is done with a debit to the Gift Cards Payable liability account and a credit to a sales revenue account.

Legal Requirements for Gift Cards

For Australia:

• Minimum three-year expiry period from the date the card is sold (mandatory).
• The expiry date must be shown clearly.
• Activation fees, account-keeping fees, and balance enquiry fees cannot be charged.

The above requirements apply to all cards sold after the 1st of November 2019. There are some exclusions to three year period. See https://consumer.gov.au/new-gift-card-laws

You can be fined if you breach the law.

Accounting for breakage: Breakage refers to the amount of gift card value that is never redeemed. Companies may estimate breakage and recognise it as revenue before the gift card has actually expired, typically based on historical redemption rates.

It's important for companies to have clear policies in place for the handling of gift cards to ensure compliance with accounting standards and accurate financial reporting.

Pros of offering gift cards

• Increased sales: Gift cards are a great way to encourage customers to make purchases, which can lead to increased sales for your business.
• Improved cash flow: When customers purchase gift cards, you receive payment upfront, which can improve your cash flow.
• Boost customer loyalty: By offering gift cards, you can reward your most loyal customers and encourage them to continue shopping with your business.
• Flexibility: Gift cards can be used for a variety of products or services, allowing customers to choose what they want to buy.
• Attract new customers: Gift cards can be a great way to attract new customers to your online store, particularly during the holiday season.

Cons of offering gift cards

• Cost: Offering gift cards can be costly, particularly if you use a third-party provider to create and manage them.
• Fraud risk: Gift cards can be subject to fraud, particularly if they are not properly secured or if there are gaps in your tracking and reporting.
• Liability: When customers purchase gift cards, you become liable for the value of the card, even if it is never redeemed.
• Customer complaints: Customers may complain if they have issues with gift cards, such as lost or stolen cards, or if they have difficulty redeeming them online.
• Competition: Offering gift cards is a common practice among e-commerce businesses, so you may need to offer additional incentives or promotions to stand out from your competitors.

Overall, offering gift cards can be a great way to boost sales and customer loyalty, but it's important to carefully consider the costs and risks before implementing a gift card program.