How should I record a gift card?

Question

I have received a $50 gift card for my birthday, and I've been thinking on how I should record it in my books, using double-entry accounting. I don't think it would make sense to classify as an expense any money that I spend using the gift card, since I'm not really losing any money. By that same logic, I don't think that receiving the gift card should be classified as a revenue.

So I've been thinking of increasing my assets by $50, while at the same time increasing my liabilities by $50. That way, whenever I spend the gift card, it won't be classified as an expense. But it just feels wrong to use a liability account, since I don't owe any money to anyone.

Another possible work-around is to use a contra-asset account: I increase my assets by $50, while at the same time subtract $50 from a contra-asset account labeled "Unspent Gift Card". Whenever I spend the gift card, I subtract the appropriate amount from the Gift Card account, and add the same amount to the Unspent Gift Card contra-account.

But I don't really know if this would be the correct way to do it. Should I just stick with normal revenues and expenses? Or what? What is the correct way to record the gift card in my books?

Answer 1

• When you receive the $50 gift card: credit $50 to an income account, and debit $50 to an asset account (e.g. "gift cards").

  i.e. increase the income account by $50, and increase the asset account by $50.

• When you spend the $50 gift card: debit $50 to your expenses, and credit $50 to the asset account above.

  i.e. increase the expense account by $50, and decrease the asset account by $50.

In double-entry accounting, debits and credits must balance. This is the case for each case above.

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I don't think it would make sense to classify as an expense any money that I spend using the gift card, since I'm not really losing any money.

Don't do that. You should classify your gift card spending as an expense. Otherwise, you may fall for the mental accounting bias. There's a paper specifically about your case: Gift Cards and Mental Accounting: Green-lighting Hedonic Spending by C Helion and G Gilovich.

Answer 2

EDIT: The second part of Flux's answer definitely addresses the main point in your question, which I somehow missed. A simple way to think about it is that if you are going to spend the $50 gift card at face value, then it is as good as $50 cash; in that scenario, the gift card and cash are mutually fungible, as mentioned in the article on mental accounting that Flux linked to.

I came to this realisation once when I wanted to redeem some supermarket loyalty points for an Amazon voucher, but the supermarket didn't offer that ability anymore. I realised that I could just redeem the same amount of points in store for the value of the Amazon item I wanted to buy, apply the discount to my supermarket shopping, and get the same net result.

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When you purchase something in the store, the balance of the gift card is applied as a credit to the store transaction. For example, your receipt may look like this:

SHOES              $40.00
SHIRT              $22.00

SUBTOTAL           $62.00

APPLY GIFT CARD   ($50.00)

TOTAL              $12.00

CASH               $15.00
CHANGE             $ 3.00

When the transaction in store takes place, you could record a split transaction in your ledger, e.g.

                      DEBIT      CREDIT
Expenses, Clothing    $62.00
Wallet                           $12.00
Gift Card                        $50.00

Seeing this should give you a good hint that, prior to spending the gift card, you should keep a "Gift Card" account which has an in-debit balance of $50.00. On receiving the gift card, credit your Income account or some such for $50.00, and debit the Gift Card account in kind. Then on spending the gift card, do as above.