How to Account for a Voucher?

Accounting for a voucher (or gift card) is a straightforward process that primarily involves recognizing it as a liability when it is sold and only recognizing revenue once it is redeemed by the customer. This approach ensures accurate financial reporting by aligning revenue recognition with the delivery of goods or services.

Understanding Vouchers in Accounting

From an accounting perspective, a voucher represents a promise or an obligation by a business to provide future goods or services to the customer who holds the voucher. When a customer purchases a voucher, they are essentially prepaying for an item or service they will receive later. This prepayment creates a liability for the business, as the company now owes something to the customer.

The Two Key Stages of Voucher Accounting

The accounting treatment for vouchers follows two main stages: the sale of the voucher and its redemption.

1. Sale of a Voucher

When a voucher is sold, the funds received are not immediately recognized as revenue. This is because the business has not yet fulfilled its part of the transaction (i.e., provided the goods or services). Instead, the amount received is recorded as a current liability on the company's balance sheet. Common names for this liability account include Unearned Revenue, Deferred Revenue, or Gift Card Liability.

This accounting treatment aligns with the revenue recognition principle, which dictates that revenue should only be recognized when it is earned, typically when the goods or services are delivered. To ensure proper tracking, internal accounting systems should assign a liability account code to voucher sales rather than a sales revenue account code.

Journal Entry at Sale:

Impact on Financial Statements:

• Balance Sheet: Increases Assets (Cash) and increases Liabilities (Unearned Revenue).
• Income Statement: No immediate impact on revenue or profit.

2. Redemption of a Voucher

When a customer uses a voucher to purchase goods or services, the business fulfills its obligation. At this point, the unearned revenue is recognized as earned revenue because the exchange of value has occurred. The liability decreases, and sales revenue is recognized.

If the value of the purchase is less than the voucher, the remaining balance of the voucher stays in the Unearned Revenue account until it is used or expires. If the purchase exceeds the voucher's value, the customer pays the difference, and that additional amount is also recognized as sales revenue.

Journal Entry at Redemption:

Impact on Financial Statements:

• Balance Sheet: Decreases Liabilities (Unearned Revenue).
• Income Statement: Increases Revenue (Sales Revenue), which subsequently impacts profit.

Special Considerations for Voucher Accounting

Beyond the basic sale and redemption, other factors can influence how vouchers are accounted for:

• Voucher Expiration (Breakage): Some vouchers have an expiration date. If a voucher expires unredeemed, and the business is legally entitled to retain the funds (depending on local regulations and company policy), the remaining unearned revenue can then be recognized as revenue. This is often referred to as "breakage revenue."
  • Journal Entry at Expiration:
    | Account | Debit | Credit |
    | :------------------------ | :------- | :------- |
    | Unearned Revenue | XXX | |
    | Expired Voucher Revenue | | XXX |
    | To record revenue from expired vouchers | | |
• Reporting on Financial Statements:
  • Balance Sheet: The "Unearned Revenue" account will appear under current liabilities as long as the vouchers are expected to be redeemed within one year.
  • Income Statement: "Sales Revenue" (or specific "Voucher Redemption Revenue") and "Expired Voucher Revenue" (if applicable) will be recognized as earned.
• Internal Controls and Tracking: Accurate accounting for vouchers requires robust internal systems to track:
  • Each voucher's unique ID and initial value.
  • Dates of sale and redemption.
  • Remaining balances after partial redemptions.
  • Expiration dates.

Summary Table of Voucher Accounting Entries

By meticulously following these accounting principles, businesses can accurately reflect the financial impact of vouchers on their books and ensure compliance with accounting standards.