Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 19:43:08 GMT -5
Unredeemed portions of gift cards are generally adjusted as 'breakage' similar to the method that businesses use to determine how much percentage of their receivables usually ends up being uncollectable.
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Deleted
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Post by Deleted on Jan 15, 2014 19:43:57 GMT -5
That's true. I'd guess a fair amount of gift cards aren't redeemed/fully redeemed...
Breakage = revenue?
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 19:46:03 GMT -5
That's true. I'd guess a fair amount of gift cards aren't redeemed/fully redeemed... Then what? Each period, you'd do a % calculation to determine how much of your gift cards are generally left unused, and you adjust that % off. This part is not an exact science, of course. This is copied from one of the above web pages as well: The issue becomes murky, however, due to the fact that many consumers never use the gift cards. This tendency of consumers to leave unused balances on their gift cards is referred to as “breakage.” The resulting question, then, is when does the breakage occur? If the card has no expiration date, then the liability could remain on a company’s books forever.
There are not clear standards addressing this. In practice, in keeping with basic accounting standards, many retailers record an estimate of breakage, taking this amount into income. To do this, they first find a reliable way to estimate the breakage percentages and trends. Current guidance suggests that at least a couple years’ worth of data is necessary to make such an estimate.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 19:50:25 GMT -5
It appears that there's no set rule on where to put your 'breakage' on your financial statements. It seems to usually be some kind of 'other income' category, and sometimes an income line item specifically made for this purpose (if gift cards are a large part of your business).
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Deleted
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Post by Deleted on Jan 15, 2014 19:51:45 GMT -5
I'm just glad we don't do gift cards!
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Virgil Showlion
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Post by Virgil Showlion on Jan 15, 2014 19:53:11 GMT -5
Unredeemed portions of gift cards are generally adjusted as 'breakage' similar to the method that businesses use to determine how much percentage of their receivables usually ends up being uncollectable. Right. Because why would you treat revenue as something dull and boring like "incoming cash" when you could enjoy the fantastically complicated process of trying to guess and revise post facto what percentage of that liability will actually wind up being a liability and what percentage of cash transacted will actually count as income? I know which one I'd pick, boy oh. I do realize you're just the messenger, but Dark's statement, "Cause accountants never do anything in one or two steps if it's possible to do it in four or five and make it twice as complicated as it needs to be." pretty much sums it up. I'll bet there's a fantastically complicated way to adjust for any interest earned on income-that's-actually-a-liability too.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 19:54:51 GMT -5
I'm just glad we don't do gift cards! When we studied this in classes, it was usually a discussion of places that sold event tickets. Imagine being the accountants for the Denver Broncos who have to do these adjustments each time there's a game, including adjusting for both used tickets and unused tickets, in addition to refunds, comps, and whatever else!
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Post by Deleted on Jan 15, 2014 19:56:19 GMT -5
But whether tickets are used or not the revenue would not change... Sigh. I'm going to just stop while none of this applies to me!
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 19:57:12 GMT -5
Generally accepted good accounting practice says that you recognize revenue when you've actually earned it by providing goods/services, and you recognize expenses when you actually incur them. This has its logic and tries to create standardization and reliability for the consuming/investing public.
Cash method accounting recognizes revenue and expenses when they occur, so those (much fewer, simpler business) handle some things differently and more simply.
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Post by Deleted on Jan 15, 2014 19:58:09 GMT -5
That's me. . We are very simple!
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Sum Dum Gai
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Post by Sum Dum Gai on Jan 15, 2014 19:59:16 GMT -5
I don't record transactions. I ring it up in the point of sale system, which is Quickbooks compatible, and uploads everything automagically. When I ring up the sale, I use gift payment as the payment method, it looks up the outstanding gift certificates by number, and applies that specific gift certificate to the sale. I honestly don't know what Quickbooks does behind the scenes with gift certificate sales and redemptions. Probably exactly what you said in your earlier post.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 19:59:38 GMT -5
But whether tickets are used or not the revenue would not change... LOL, it depends on where you account for your breakage. Unused tickets might go to 'other revenue' (as opposed to 'ticket revenue') in order to keep track of how many of your ticket sales are going unused. You might want/need that info to adjust your business model or practices. Or it might all go to the same place. How much info you need usually depends on how much of a % of your business these things fall into. For example, if Dark learns from this that a large percentage of his gift cards are remaining unused, he might start pumping them to his customers more. If he learns that people are redeeming nearly all of them, it's less of a boost to his bottom line and he wouldn't want to spend extra time/money on trying to sell them. There's value in the info, unless it's too small of a % of business to make any difference.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 15, 2014 20:00:21 GMT -5
I don't record transactions. I ring it up in the point of sale system, which is Quickbooks compatible, and uploads everything automagically. When I ring up the sale, I use gift payment as the payment method, it looks up the outstanding gift certificates by number, and applies that specific gift certificate to the sale. I honestly don't know what Quickbooks does behind the scenes with gift certificate sales and redemptions. Probably exactly what you said in your earlier post. Yeah, absent other info, Quickbooks might be set up to do this kind of stuff for you behind the scenes.
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NastyWoman
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Post by NastyWoman on Jan 15, 2014 20:14:41 GMT -5
January so far 1 - $0.00 (Wed Closed for New Year's Day) 2 - $86.74 3 - $293.37 4 - $423.62 5 - $224.51 6 - $23.91 7 - $26.02 8 - $401.02 (Wed) 9 - $90.52 10 - $163.28 11 - $185.93 12 - $122.97 13 - $93.29 Monthly AVG = $164.24 AVG since open = $566.50 Are you on Amazon yet so we can help you skew the january numbers upwards?
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milee
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Post by milee on Jan 15, 2014 20:40:22 GMT -5
The day to day swings a lot if you compare Saturdays to Mondays, but I think she meant my Mondays are all pretty similar, my Saturdays are all pretty similar, etc., and my month to month is about the same. Obviously with a bump for Christmas in December, and the caveat that the sample size is tiny. This.
With a brand new store and the possibility that an individual sale could be $500 - $1000 (Christmas season), I expected more spikes and flatlines than there were. January isn't surprising.
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Post by Deleted on Jan 15, 2014 22:14:58 GMT -5
Unredeemed portions of gift cards are generally adjusted as 'breakage' similar to the method that businesses use to determine how much percentage of their receivables usually ends up being uncollectable. Right. Because why would you treat revenue as something dull and boring like "incoming cash" when you could enjoy the fantastically complicated process of trying to guess and revise post facto what percentage of that liability will actually wind up being a liability and what percentage of cash transacted will actually count as income? I know which one I'd pick, boy oh. I do realize you're just the messenger, but Dark's statement, "Cause accountants never do anything in one or two steps if it's possible to do it in four or five and make it twice as complicated as it needs to be." pretty much sums it up. I'll bet there's a fantastically complicated way to adjust for any interest earned on income-that's-actually-a-liability too. Because there too much possibility for manipulation by the company if revenue is recognized on a cash basis. Rules are made more and more comlicated to solve an issue of manipulation by companies.
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milee
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Post by milee on Jan 15, 2014 22:33:38 GMT -5
Right. Because why would you treat revenue as something dull and boring like "incoming cash" when you could enjoy the fantastically complicated process of trying to guess and revise post facto what percentage of that liability will actually wind up being a liability and what percentage of cash transacted will actually count as income? I know which one I'd pick, boy oh. I do realize you're just the messenger, but Dark's statement, "Cause accountants never do anything in one or two steps if it's possible to do it in four or five and make it twice as complicated as it needs to be." pretty much sums it up. I'll bet there's a fantastically complicated way to adjust for any interest earned on income-that's-actually-a-liability too. Because there too much possibility for manipulation by the company if revenue is recognized on a cash basis. Rules are made more and more comlicated to solve an issue of manipulation by companies. And to give investors or potential purchasers of the company an idea of what liabilities are out there. It would be totally unfair to buy a company based on $X in sales only to discover that although that lucky prior owner had indeed collected $X, those weren't sales, but gift cards and now all those people are going to come in and use them at your store. In that situation, you as the new owner will be collecting $0, but will have to give out all the related product. Double ouch.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 16, 2014 0:21:32 GMT -5
Virgil, it's actually kinda the opposite. Liabilities count against assets, not revenue. So the big wad of cash (assets) you got is offset by the same amount in new liabilities.
Revenue and expenses are unaffected until you give the customer something from inventory. At that point, you recognize the revenue during the same month you lose some of your inventory (incurring an expense).
If gift cards were recognized as revenue at the time of sale, you'd have a big wad of cash, higher sales, and your inventory would still be as highly valued as before. That would be much easier way to manipulate you'd books.
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reader79
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Post by reader79 on Jan 16, 2014 10:24:53 GMT -5
We have to wait five years I believe, before we can consider unredeemed gift cards in our balance sheet (not sure if that is the exact term.) Our finance department then credits them on a monthly basis. I would check state law to see what the regulations are in CA.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 16, 2014 10:26:20 GMT -5
We have to wait five years I believe, before we can consider unredeemed gift cards in our balance sheet (not sure if that is the exact term.) Our finance department then credits them on a monthly basis. I would check state law to see what the regulations are in CA. That's interesting if it's governed by state law. What I found in a google search seemed to indicate that it was up to each business/industry to determine when to begin writing off and how much of a % to use. Fascinating!
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reader79
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Post by reader79 on Jan 16, 2014 10:36:17 GMT -5
It was a change for us because when we opened we had a one-year expiration date on gift certificates, and then the laws changed to prevent that. We would always just issue a new one though if the customer asked, because it's pretty shitty service to deny redemption. Found this on the FTC website: www.consumer.ftc.gov/articles/0182-gift-cards
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 16, 2014 10:44:41 GMT -5
Oh, you mean the change in regulation of expiration dates for consumers. What I found online still seems to indicate that the determination of when to consider a gift card as 'breakage' for accounting purposes lies with the company. For example, some studies indicate that if a gift card has not been redeemed within 2 years, it's unlikely to be redeemed ever. A similar process occurs when a company has to self-determine at what point/percentage to consider A/R accounts uncollectable even if they someday may still possibly be paid. Fortunately, I don't have to deal with them myself, so it's all academic until I ever have an employer or client who issues them. So, hopefully never!
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Virgil Showlion
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Post by Virgil Showlion on Jan 16, 2014 11:21:07 GMT -5
Virgil, it's actually kinda the opposite. Liabilities count against assets, not revenue. So the big wad of cash (assets) you got is offset by the same amount in new liabilities. Revenue and expenses are unaffected until you give the customer something from inventory. At that point, you recognize the revenue during the same month you lose some of your inventory (incurring an expense). If gift cards were recognized as revenue at the time of sale, you'd have a big wad of cash, higher sales, and your inventory would still be as highly valued as before. That would be much easier way to manipulate you'd books. I guess I don't have enough of an enterprising criminal mindset. To me what would make sense for a $50 gift card is to immediately book two items: $50 cash as an asset, and $30 as a liability, corresponding to the fact that I'm now liable for $30 worth of Lego when the card is redeemed. When the card was redeemed, I'd reduce the liability accordingly. If investors, etc. looked at my books, they would see both that my cashflow is good because people are buying my gift cards, and that I've got an $X outstanding liability to make good on those cards. I realize that divorces the line items from the actual exchange of physical goods, but we're already in a situation where a fair percentage of the physical goods will never be claimed and phantom income like "breakage"--which is also divorced from the exchange of physical goods--needs to come in to rectify the problem. Or in other words, we're never going to perfectly sync up cash transactions with goods transactions. But admittedly I know next to nothing about business accounting practices, and if my system is more easily gamed, I'll certainly take your word for it. I guess it's just unfortunate the rules have to be so abstruse to prevent fraud.
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Rocky Mtn Saver
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Post by Rocky Mtn Saver on Jan 16, 2014 11:27:50 GMT -5
Virgil, it's actually kinda the opposite. Liabilities count against assets, not revenue. So the big wad of cash (assets) you got is offset by the same amount in new liabilities. Revenue and expenses are unaffected until you give the customer something from inventory. At that point, you recognize the revenue during the same month you lose some of your inventory (incurring an expense). If gift cards were recognized as revenue at the time of sale, you'd have a big wad of cash, higher sales, and your inventory would still be as highly valued as before. That would be much easier way to manipulate you'd books. I guess I don't have enough of an enterprising criminal mindset. To me what would make sense for a $50 gift card is to immediately book two items: $50 cash as an asset, and $30 as a liability, corresponding to the fact that I'm now liable for $30 worth of Lego when the card is redeemed. When the card was redeemed, I'd reduce the liability accordingly. If investors, etc. looked at my books, they would see both that my cashflow is good because people are buying my gift cards, and that I've got an $X outstanding liability to make good on those cards. Basically, yes, you've got it! However, the 2-part transaction is not just to prevent cooking of the books. We generally use double-entry accounting, which requires 2 sides to each transaction: a debit and a credit. Normally, for a basic sale, you'd (in effect) increase your cash and decrease your inventory because you sold an item. If you sell a gift card, you increase your cash, but you can't decrease inventory at that point because you didn't sell anything from inventory. You're missing half your transaction. Correspondingly, when the customer comes back to redeem the card, you have the reverse problem. You'd now decrease your inventory because something is going out the door, but you can't increase cash - you didn't receive any cash! Something has to fill in the blanks in both of those 2-part transactions. Hence the addition of one more step.
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Post by Deleted on Jan 16, 2014 12:17:35 GMT -5
This is similar to how I was taught to handle the accounting for advance purchase items like event tickets. Until they're redeemed for goods/services, they're technically considered a liability to the seller. www.accountingcoach.com/blog/sale-gift-certificatesThe sale of a gift certificate should be recorded with a debit to the asset account Cash and a credit to the liability account Gift Certificates Outstanding. (Revenue is not recorded until merchandise or services are provided to the customer.)
When a customer presents the gift certificate for merchandise or for services, the liability account Gift Certificates Outstanding will be reduced with a debit and a revenue account will be credited. If the revenue is a sale of merchandise, the income statement will match the cost of goods sold and other expenses with the revenue.
So I can sell a billion dollars' worth of gift cards and still have no revenue? How does that make sense? Why do it like that? you have the cash, but you really havent sold anything all you did was replace the customers cash with a we owe of sorts they can then use that we owe to purchase goods or services from your establishment until the goods are sold, there is NO revenue..... both sides affect balance sheet....not the p&l
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reader79
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Post by reader79 on Jan 16, 2014 14:05:21 GMT -5
I don't know what the legal requirement is for the store on how they account for it, but in our case I was told that they (corporate finance) would not allow us to show this as any type of credit until five years have passed. No percentage based on average margin, no sliding scale, nothing. In our daily sales reporting, they are backed out of the total as if they do not exist.
Also, considering the original intent of this thread, we have been approached a few times by movie production companies. But normally they are looking to pay us to use the store - loss of business for being closed, any product they may open/damage, etc. I would try to get on the radar of location scouts in the area, because if you appear in a television show or a movie, you can end up on the tours. I go to a pizzeria that was in one of the Men In Black movies, and they have a full coach bus that stops there a few times a week. They do big business off of this. As does FAO for being in the movie BIG. Every time I go in there I see people taking pictures as they dance on that piano.
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Sum Dum Gai
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Post by Sum Dum Gai on Jan 16, 2014 14:10:12 GMT -5
I highly doubt we have location scouts in this area. This is a pretty generic small California town. Lots of houses, lots of national chains, a smattering of local businesses. Nothing to write home about. The only interesting thing here is the old mission, and it's not even here exactly. It's in the really small town on the edge of the county.
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Sum Dum Gai
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Post by Sum Dum Gai on Jan 16, 2014 14:11:05 GMT -5
Wait, corporate? Are you a franchise?
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tskeeter
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Post by tskeeter on Jan 16, 2014 14:31:12 GMT -5
But whether tickets are used or not the revenue would not change... LOL, it depends on where you account for your breakage. Unused tickets might go to 'other revenue' (as opposed to 'ticket revenue') in order to keep track of how many of your ticket sales are going unused. You might want/need that info to adjust your business model or practices. Or it might all go to the same place. How much info you need usually depends on how much of a % of your business these things fall into. For example, if Dark learns from this that a large percentage of his gift cards are remaining unused, he might start pumping them to his customers more. If he learns that people are redeeming nearly all of them, it's less of a boost to his bottom line and he wouldn't want to spend extra time/money on trying to sell them. There's value in the info, unless it's too small of a % of business to make any difference. Another thing to consider for a business issuing gift cards is that most states have escheat laws. These laws prevent businesses from benefiting from things like checks that never get cashed and gift cards that are never redeemed. Businesses are required to turn over "unearned" funds to the state so that the state can "find" the true owner of the funds and return the funds to them. At least in theory, that's how it works. So, selling a bunch of gift cards that never get redeemed really won't benefit Dark's business.
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reader79
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Post by reader79 on Jan 16, 2014 15:32:50 GMT -5
No, it's a retail store in the corporate headquarters. I'll PM you.
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