Accounting for Gift Cards: A Simple Guide for Restaurant Owners

Gift cards aren’t just a sweet surprise for your customers, they’re also low-key moneymakers for your restaurant. 
Think of them as mini pre-paid meals that bring in cash upfront and boost customer loyalty down the line.

But when it comes to handling the accounting side of these little plastic promises, things can get complicated, between redemptions, expired cards, state-specific regulations, and that one customer who swears they lost their card.

Here’s a simple breakdown to help you stay on top of it all.

So, How Do Gift Cards Work?

Imagine someone walks into your restaurant and buys a $60 gift card. Boom, you’ve got $60 in your pocket, but here’s the catch, you haven’t actually earned that money yet. Why? Because nobody’s eaten anything yet!

That $60 is what accountants call “deferred revenue.” It’s kinda like someone handing you money today for food they’ll eat next week. You gotta hold off on counting it as income until the meal actually happens.

Example:

•    Jan 5: Customer buys $60 gift card → You record $60 cash and $60 deferred revenue.
•    Jan 12: Their cousin comes in and uses the card to grab lunch for $20 → You move $20 from deferred revenue to actual revenue.

Simple, right? But wait, there's more..

What if the Card Never Gets Used? (Aka: Breakage)

Here's where it gets interesting. Sometimes, people never use their gift cards. Maybe they forget, maybe they lose it, maybe they move to the new city. Whatever the reason, that unused balance is called breakage.

Breakage is the portion of gift cards that just sit there, never redeemed. That unspent cash? You can recognize it as revenue, but only after you’re pretty sure no one's coming back for it.

How Do You Estimate Breakage?

This is where you play detective. You look at the past 5-10 years of gift card redemption rates and spot patterns.
Let’s say you find that about 90% of your gift cards get redeemed in the first two years. That leftover 10%? That’s your breakage estimate.

You can recognize that as income gradually over time, according to ASC 606 (the official accounting rulebook for revenue).

Quick tip: If you’re new to gift cards and don’t have any past data, a 5–10% breakage estimate is a decent starting point.

Accounting for Breakage

Let’s say you sold $100,000 in gift cards in 2019. By 2024, you see that 95% have been redeemed. That means $5,000 is breakage.

Now, you don’t just dump all $5,000 into revenue at once. You have to spread it out based on how redemptions usually go.

It’s kinda like pouring a soda evenly into several cups.

Breakage Journal Entry

When it’s time to recognize breakage, here’s the journal entry you do:

•    Debit (reduce) Deferred Revenue
•    Credit (add) Breakage Revenue

Want to keep things tidy? Create a contra liability account for breakage so you can track it separately from your active gift card balances.

It’s like organizing your closet by seasons, making your life easier when you need to find stuff later.

Watch Out for Escheatment

Some states have laws that say: “Hey, if nobody uses that gift card in X years, the money has to go to the state.”
This is called escheatment, and it’s basically the government’s way of collecting forgotten money. Not all states do this, but if yours does, make sure you:

•    Track where each gift card was sold.
•    Remove those cards from your breakage calculations.
•    Stay compliant with state laws, or Uncle Sam might come knocking.

Promotions: Buy $100, Get $20 Free

Holiday season comes around, and you decide to run a promo: Buy a $100 gift card, get a $20 bonus card. 
Great for boosting sales, right? Totally! But here's how to handle it in your books:

•    Record the $100 sale as deferred revenue.
•    Record the extra $20 as freebie (a promotion expense, not revenue)

As the gift card is used, you recognize the revenue and promotion costs in proportion. For every $6 redeemed, $1 is marked as a promotional expense. It’s all about matching income with expense, just like pairing fries with a burger.

You can’t count promotional cards in your breakage estimates, as they were never actual revenue to begin with.

Make Gift Cards Work for You

Accounting for gift cards doesn’t have to be a nightmare. With a clear understanding of how to record sales, manage redemptions, estimate breakage, and comply with state laws, you can stay on top of your restaurant accounting and keep operations running smoothly.

Here’s your cheat sheet:

•    Gift card sale = Cash in, deferred revenue.
•    Redemption = Move $ from deferred revenue to actual revenue.
•    Unused balance (breakage) = Recognized slowly using historical data.
•    Promotions = Separate liabilities and expenses.
•    Stay legal = Know your state’s escheatment rules.

At the end of the day, gift cards are a solid win-win. Your customers love giving them, and you get paid upfront. Just make sure your books keep up with the swipes!