As business owners, we often sell gift vouchers to customers, as well as hold competitions where we giveaway products or services. I’m going to explain how you deal with giveaways and gift vouchers when it comes to your business accounts, so listen up…
Selling and Redeeming Gift Vouchers
Selling a gift voucher to a customer is selling a specific dollar value of products, but without having to give them the products at that time. Usually there is an expiry date of a set number of months in which it needs to be redeemed or it will no longer be valid. In effect you have a commitment to exchange the voucher for your goods or services at a point in the future. This very closely matches the definition of a liability. In your accounts you need to create a new liability account called gift vouchers sold. When a voucher is sold you allocate the transaction to this new account. When the voucher is redeemed or expires then this is when the sale takes place and you need to create a transaction to move the amount from the liability account to sales. This is the point at which GST is included in the transactions.
But I hear you say, “Why can’t I just put it in my accounts when the voucher is sold?” Because strange but true, sometimes the vouchers are never used and also you need to know the vouchers issued but not yet redeemed at the end of the year. You’ll also need to ear mark some of that money to pay the GST amount for that voucher when it is used. You can find out more about GST and gift vouchers on the IRD website.
How Do I Show Product Giveaways in My Accounts?
Giveaways are usually held as a way of marketing your business. Therefore, when you giveaway a product, simply deduct it from your stock inventory and add the cost to you of it to your marketing expenses by a journal. Alternatively, you could wait until your next stock take and the count will be lower (by the number of items given away) and this will show you have a lower gross profit.
For example, if over the financial year you sold 100 products for $10 each, you would have a gross income of $1000. If each product cost you $5 to sell, you would have expenditure of $500. Then if you gave 5 products away in a giveaway, it would cost you $25 worth of product. The cost of goods sold would be $525, even though you only physically sold $500, as the $25 giveaway product costs would be included in there. So instead of having a $500 gross profit, you’d have $475 instead.
You should keep a record of all gift certificates you sell, their value, date redeemed and expiration date. You can also record separately the details of your giveaway for your helpful accountants and bookkeepers too, such as me! As always, I’m more than happy to help answer your accounting and bookkeeping questions, so please get in touch.