What is recorded when a gift card is sold by a company?

When a gift card is sold by a company, the transaction is recorded as deferred revenue. This is because the company has received cash from the customer, but it has not yet provided the goods or services that the customer can redeem using the gift card. As such, the company has an obligation to fulfill that promise in the future, which creates a liability known as deferred revenue.

This approach aligns with the revenue recognition principle, which states that revenue should be recognized when it is earned, not when cash is received. In the case of a gift card, even though the cash has been received, the company cannot recognize that cash as revenue until the gift card is redeemed for goods or services. Until then, the amount remains a liability on the balance sheet under deferred revenue, reflecting the company's obligation to provide value to the gift card holder.

Other options, although related to the transaction, do not accurately describe the accounting treatment for the sale of a gift card. For instance, sales revenue would only be recognized once the gift card is redeemed, and cash inflow pertains to the increase in cash on the company’s assets but does not capture the accompanying liability that arises from the gift card sale. Unearned revenue is a term that is often used interchangeably with