Turning Gift Cards into Revenue

Those of you interested in marketing know that gift cards are among the hottest tools in merchandising today. Customers purchase gift cards and give them to someone for later use. In a recent year gift-card sales topped $95 billion.

Although these programs are popular with marketing executives, they create accounting questions. Should revenue be recorded at the time the gift card is sold, or when it is used by the customer? How should expired gift cards be accounted for? In its 2004 balance sheer Best Buy reported unearned revenue related to gift cards of $300 million.

Adjusting Entries for Accruals

The second category of adjusting entries is accrual. Companies make adjusting entries for accruals to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.

ACCRUED REVENUES

Revenue earned but not yet recorded at the statement date are accrued revenues. Accrued revenues may accumulate (accrue) with the passing of time, as in the case of interest revenue and rent revenue. Or they result from service that have been performed but are neither billed nor collected. The former are unrecorded because the earning process (e.g., of interest and rent) does not involve daily transactions. The latter may be unrecorded because the company has provided only a portion of the total service.

An adjusting entry for accrued revenues serves two purposes: (1) It shows the receivable that exists at the balance sheet date, and (2) it records the revenues earned during the period. Prior to adjustment, both assets and revenues are understated. Therefore, as Illustration 3-13 shows, an adjusting entry for accrued revenues increases (debits) an asset account and increases (credits) a revenue account.

ACCRUED EXPENSES

Expenses incurred but not yet paid or recorded at the statement date are accrued expenses. Interest, rent, taxes, and salaries are typical accrued expenses. Accrued expenses result from the same causes as accrued revenues. Infact, an accrued expense on the books of one company is an accrued revenue to another company. For example, Pioneer's $200 accrual of revenue is an accrued expense to the client that received the service.

An adjusting entry for accrued expenses serves two purposes:(1) It records the obligations that exist at the balance sheet date, and (2) it recognizes the expenses of the current accounting period. Prior to adjustment, both liabilities and expenses are understated. Therefore, as Illustration 3-16 shows, an adjusting entry for accrued expenses increases (debits) an expense account and increases (credits) a liability account.

Post By : Rony Sutiyanto