Gift Card Liability
Gift Card Liability is the accounting obligation that a retailer carries for the total value of unredeemed gift cards. When a customer buys a gift card, the payment is not immediately recognized as revenue—it’s recorded as a liability (specifically, deferred revenue or a contract liability) on the balance sheet. The liability is reduced only as the gift card is redeemed for goods or services.
Why gift card sales aren’t immediate revenue
Under modern revenue recognition standards (such as ASC 606 in the US and IFRS 15 internationally), revenue is recognized when a performance obligation is satisfied—that is, when goods or services are delivered to the customer. Selling a gift card creates an obligation to provide goods/services in the future. Until the recipient actually uses the card, the retailer hasn’t fulfilled that obligation, so the payment remains a liability.
How liability is reduced
- Redemption: Each time a gift card is used, the corresponding amount moves from liability to revenue.
- Breakage recognition: Estimated unredeemable amounts can be recognized proportionally over time, based on historical redemption patterns.
- Escheatment: In some jurisdictions, unclaimed balances must be remitted to the state, removing them from the company’s books.
Implications for store owners
Even small WooCommerce stores should understand gift card liability if they sell gift cards in any volume. While micro-businesses may not follow formal GAAP or IFRS, understanding that gift card income is deferred helps with cash flow planning, tax reporting, and setting realistic revenue expectations. If you’re using accounting software, ensure gift card sales are categorized correctly as deferred revenue rather than product sales.