Gift cards, rebates, warranties, and early-payment discounts

When you sell a gift card, you have received cash but owe goods or services later. Record a liability. When the card is redeemed, reduce the liability and record the sale. Track the balance of unredeemed cards so the books show what you owe customers.

Cards that are never used, called breakage, cannot always be kept as income. Many states have unclaimed property laws that require businesses to remit certain unredeemed balances. Check your state's rules before you recognize breakage.

A volume rebate or loyalty incentive promises a customer money back if they hit a target. Treat the expected payout as a reduction of revenue as sales are made, not when the check goes out. Track each program with its terms, the customer's progress, and the estimate of what you will pay.

A warranty promises repair or replacement. Expected costs belong in the period of the sale. Track claims by product, cause, and cost, and compare actual cost with your estimate. A product with rising claims shows up in the data before it shows up in reviews.

Terms like 2/10 net 30 offer a 2 percent discount if the customer pays within 10 days instead of 30. The discount costs you 2 percent, and it buys cash 20 days sooner. That equals roughly a 37 percent annualized cost, which is expensive compared with a line of credit. It can still make sense if you are short of cash or collections are slow. Decide with the numbers, and track the discounts taken.

Review unredeemed gift cards, open rebate programs, warranty claims against the estimate, and discounts taken. Adjust estimates when experience differs. These balances are small until they are not.

A shop sells $200 of gift cards in December. The cash goes in, and a $200 liability goes on the balance sheet. In January, customers redeem $140 across several purchases. The shop records $140 of sales and reduces the liability to $60. Nothing in December was revenue. In many states sales tax applies when the card is redeemed instead of when it is sold, but the rule differs, so confirm yours.

A distributor promises a customer a 3 percent rebate if purchases reach $100,000 for the year. By September the customer has bought $80,000 and is on track to hit the target. The distributor reduces revenue by 3 percent of those sales, which is $2,400, and records a rebate liability for the same amount. If the customer later falls short, the estimate is reversed.