How do I record income from gift cards or vouchers?

What “recording income” means for gift cards and vouchers

Gift cards and vouchers are deceptively simple: someone pays money, something is issued, and later it gets redeemed. But behind that everyday flow is a key accounting idea that trips people up—when cash comes in for a gift card or voucher, it often is not income yet. In most situations, it’s a liability: you owe the customer goods or services in the future. Recording income correctly is about recognizing revenue at the point you’ve delivered what was promised (or when it becomes clear you won’t have to deliver it), not merely when you receive the cash.

If you record income too early, your sales can look inflated, you could pay too much tax depending on your tax rules, and your financial reports won’t match the reality of what you’ve delivered. If you record income too late, you might understate performance and create confusion when redemption spikes. The goal is to record: (1) cash received, (2) the obligation created, (3) the revenue earned when redeemed, and (4) any remaining value that will never be redeemed (“breakage”)—all in a way that’s consistent, explainable, and easy to maintain.

Gift cards vs vouchers: similar mechanics, different business realities

People use the terms “gift card” and “voucher” interchangeably, but there are differences that can affect how you record them in practice. A gift card usually represents a stored-value promise issued by the merchant (or by a third party on the merchant’s behalf), redeemable for whatever the merchant sells up to a value. A voucher can be value-based (e.g., “£25 off”) or entitlement-based (e.g., “one haircut” or “three yoga classes”).

From a bookkeeping standpoint, both commonly create “deferred revenue” (also called “unearned revenue”) or a similar liability until redemption. The twist comes from the terms: expiry dates, restrictions, partial redemptions, refunds, and whether the voucher is issued by you or by a third party. Those details shape the timing and method of revenue recognition.

The core principle: cash in is not always revenue

When you sell a gift card or voucher, you’re typically receiving payment before providing goods or services. That means you have an obligation to supply something later. In many accounting setups, the initial entry is:

Debit: Cash/Bank (or Merchant Clearing/Undeposited Funds)
Credit: Gift Card/Voucher Liability (Deferred Revenue)

This is the cleanest mental model: you’ve taken money and now you owe the customer. Revenue is recognized when the customer redeems the card/voucher and you deliver the goods or services. At redemption, you reduce the liability and record revenue (and any tax effects, depending on your tax approach and local rules).

That sounds straightforward until you add real-life complexity: multi-location redemptions, refunds, third-party marketplaces, partial redemptions, expiries, promotional vouchers, and the difference between a discount voucher and a stored-value voucher. So let’s break it down systematically.

Step-by-step: the most common scenario (you issue and redeem your own gift cards)

Assume you run a retail shop, salon, café, or online store and you sell your own gift cards. The simplest life cycle has three stages: sale, redemption, and end-of-life (unused or expired).

1) When you sell the gift card

If you sell a £100 gift card and take payment immediately, you record the cash but not sales revenue:

Debit: Bank/Cash £100
Credit: Gift Card Liability (Deferred Revenue) £100

On your balance sheet, you now show an extra £100 of cash and a £100 liability. Your profit and loss statement shows no revenue from that transaction yet.

If you sell through an online checkout that batches payments and deposits them later, you might post to a clearing account first:

Debit: Payment Processor Clearing £100
Credit: Gift Card Liability £100

Then when the funds hit the bank:

Debit: Bank/Cash £100
Credit: Payment Processor Clearing £100

This keeps bank reconciliation tidy and prevents you from confusing “money earned” with “money received.”

2) When the gift card is redeemed

Now the customer uses the gift card to buy products or services. Suppose they redeem £40 of the £100 card. At the point you deliver the goods/services, you recognize revenue and reduce the liability:

Debit: Gift Card Liability £40
Credit: Sales Revenue £40

If you track tax at redemption (common in many setups), you’ll also record output tax based on the taxable portion and your tax rules. A simplified approach might be:

Debit: Gift Card Liability £40
Credit: Sales Revenue £33.33
Credit: Output Tax Payable £6.67

Whether you split it like that depends on whether your sales prices are tax-inclusive, how your point-of-sale system records tax, and how your jurisdiction treats gift cards and vouchers for tax purposes. The key bookkeeping idea remains: liability down, revenue up when you deliver.

3) When the gift card is partially redeemed multiple times

Each redemption reduces the liability by the amount redeemed and recognizes revenue for the value of goods/services delivered. You don’t need a special method for partial redemptions beyond ensuring your systems track remaining balances accurately.

Operationally, what matters is that your gift card liability account should tie out to the outstanding gift card balances shown in your gift card system, point-of-sale system, or gift card provider portal. If those numbers drift apart, you’ll spend a lot of time chasing differences.

Discount vouchers are not the same as gift cards

A common mistake is treating every voucher as deferred revenue. A “discount voucher” (for example, “10% off” or “£5 off your next visit”) generally is not a stored-value payment. The customer hasn’t paid you for that discount; it’s a marketing tool. In many cases, discount vouchers do not create a liability at issuance because you haven’t received cash and you don’t owe goods; you’re simply offering a reduction in the price if the customer buys something later.

For a discount voucher, the accounting is usually handled at the time of sale by recording the actual amount the customer pays as revenue. For example, if the normal price is £50 and the customer uses a £10 discount voucher and pays £40, you generally record £40 revenue (plus relevant tax) and potentially track the £10 as a marketing expense or a reduction of revenue, depending on your reporting preference and the nature of the promotion.

That said, entitlement-based vouchers (e.g., “one massage”) can behave more like prepaid services, especially if the customer paid for the voucher. In that case, deferred revenue is often appropriate until the service is delivered.

Promotional vouchers vs prepaid vouchers: a quick test

If you’re unsure whether a voucher should be recorded as a liability at issuance, ask two questions:

1) Did the customer pay you (or did a third party pay you) to obtain the voucher? If yes, it likely creates deferred revenue or a contract liability until redemption.

2) Does the voucher represent a promise to deliver goods/services without additional payment? If yes, and it was paid for, that’s typically deferred revenue until you deliver.

Pure promotions where nobody pays you to issue the voucher usually do not create deferred revenue at issuance. They become relevant when used in a sale.

How to record income when vouchers are sold as part of bundles or packages

Many businesses sell packages—like “buy five classes, get one free” or “£200 voucher pack for £180.” These can create allocation questions: how much revenue is earned when a portion of the bundle is redeemed?

A practical approach is to define the “value” and allocate based on what the customer purchased. For example, if a customer pays £180 for £200 of stored value, you can treat the £180 as deferred revenue and recognize it as the voucher is redeemed. If the customer redeems £50 of value, you recognize £45 of revenue (because £50/£200 = 25% of the value, applied to the £180 proceeds). This keeps the economics consistent: you sold £200 of value for £180, so every £1 redeemed represents £0.90 of revenue.

Alternatively, some systems simply recognize the face value at redemption and record the discount at time of issuance as a marketing expense. Either can work, but you should pick one policy and apply it consistently so reporting is clear and reconcilable.

Third-party gift cards and marketplaces: who owes what?

Complexity increases when gift cards or vouchers are sold or redeemed through third parties. Common examples include:

• A gift card marketplace sells your vouchers and takes a commission.
• A delivery platform issues credits customers can use at your business.
• A multi-brand gift card is redeemed at your store.
• A corporate client buys vouchers through an agency.

In these cases, the accounting depends on the flow of funds and who is the “issuer” of the obligation. You need to identify whether you are receiving cash at issuance or only at redemption, and whether you are acting as principal (you control the goods/services being provided) or as an agent (you facilitate another party’s goods/services).

Common pattern A: third party sells, you receive funds upfront (net of commission)

If the marketplace collects £100 from a customer and then remits £90 to you, keeping £10 commission, and you are still responsible for providing £100 worth of goods/services (or whatever the voucher terms state), your entries might look like this on receipt of funds:

Debit: Bank £90
Debit: Commission Expense £10
Credit: Voucher Liability £100

You’re recognizing the full obligation (what the customer can redeem), plus the cost of acquiring that customer (the commission). Revenue is then recognized when the voucher is redeemed, reducing the liability.

Common pattern B: third party only pays you when the voucher is redeemed

Some platforms do not remit funds until redemption occurs. In that case, you may not record a liability at issuance because you have not received consideration. When redemption occurs, you record revenue and a receivable from the platform, then cash when paid.

Example at redemption for £40 redeemed:

Debit: Accounts Receivable (Platform) £40
Credit: Sales Revenue £40

If the platform takes a fee, the receivable may be net or gross depending on statements. If gross statements show £40 redeemed and £4 fee:

Debit: Accounts Receivable £36
Debit: Commission Expense £4
Credit: Sales Revenue £40

The key is aligning your entries with platform settlement reports so reconciliation is straightforward.

Refunds and chargebacks: what happens to deferred revenue?

Refunds complicate gift cards and vouchers because the “product” is a promise. If you refund an unredeemed gift card, you’re reversing the liability and returning cash. If you refund a partially redeemed gift card, you must clarify whether your policy allows refunding remaining balances and how you treat the already-delivered goods/services.

Refunding an unredeemed gift card

If a £100 card is fully unredeemed and you approve a refund:

Debit: Gift Card Liability £100
Credit: Bank/Cash £100

Chargeback on a gift card sale

A chargeback often removes cash from your bank while you may still have an outstanding obligation if the card remains active. Operationally, you should usually void or freeze the gift card balance if a chargeback is confirmed, because you should not provide goods/services for a payment you did not ultimately receive.

From an accounting perspective, you reverse the original sale entry (and potentially record dispute fees separately). The exact entries depend on your bank and processor reports, but the principle is: reduce cash and reduce the liability, because the obligation is no longer valid once the payment is reversed (assuming the card is cancelled).

Expired, unused, or never-redeemed value: recording breakage income

“Breakage” refers to gift card or voucher balances that are not expected to be redeemed. This is where many businesses get stuck: you have a liability on your balance sheet that may never be called upon, and at some point it becomes reasonable to recognize income from that breakage.

There are generally two practical approaches businesses use:

Approach 1: Recognize breakage when it becomes remote that the customer will redeem
This approach recognizes breakage based on experience and patterns. If you can reliably estimate the portion that will never be redeemed, you can recognize breakage in proportion to actual redemptions over time. For example, if historically 5% of gift card value is never redeemed, you may recognize that 5% gradually as redemptions occur (rather than waiting years).

Approach 2: Recognize breakage when the card expires or is legally released
Some businesses wait until expiry or until a legally defined period passes. At that point, the obligation is considered released and the remaining balance can be recognized as income. This is simpler but can create lumpy revenue and may leave old liabilities sitting on your books.

If a £100 card has £12 remaining and you determine it is no longer expected to be redeemed, a typical entry is:

Debit: Gift Card Liability £12
Credit: Breakage Income (or Other Income) £12

Where you present that income (within sales vs other income) is a policy decision. Many businesses prefer keeping it out of core sales metrics so it doesn’t distort performance. Others include it within revenue if it’s considered part of normal operations. Consistency matters more than the label.

How to handle gift cards used to pay for taxable and non-taxable items

If your business sells a mix of items (for example, taxable products and non-taxable services, or different tax rates), the tax liability is usually determined by what is sold at redemption, not at issuance, in many setups. That means your point-of-sale system should calculate tax when the gift card is used to buy specific items, and your accounting should mirror that.

Practically, it’s easiest if your POS posts redemption sales exactly like normal sales, then separately records the payment method as “gift card.” The accounting system can then reclassify the “gift card payment” portion from a liability rather than treating it as cash received that day. If you instead ring gift card redemptions as discounts or as “no tax” adjustments, you’ll create inaccurate tax reporting and a gift card liability that won’t tie out.

Recording income for gift cards sold and redeemed in different periods

One of the main reasons businesses use deferred revenue is to match revenue to the period when goods/services are delivered. This is critical for accurate month-end reporting. Imagine you sell £10,000 of gift cards in December and only £2,500 are redeemed in December, with the rest redeemed in January and February. If you record all £10,000 as December income, December profits look great and January looks weak, even though the work of delivering the goods or services happens later.

With proper recording, December shows increased cash and a larger liability, while January and February show revenue as redemptions occur. This produces more meaningful financial statements and makes it easier to forecast staffing, inventory, and cash needs.

Practical chart of accounts setup

To keep things organized, many businesses create a small set of dedicated accounts. A clean setup might include:

• Gift Card Liability (current liability)
• Voucher Liability (current liability, if vouchers have different terms and you want separation)
• Gift Card Breakage Income (other income or revenue, depending on your preference)
• Gift Card Fees/Commissions (expense, if you pay third parties for issuance or marketing)
• Payment Processor Clearing (asset, if you need it for deposits and reconciliation)

If you are small and want simplicity, you can keep one liability account for all stored value. If you operate multiple lines (retail, services, online), you might split liabilities by channel so you can understand where outstanding obligations sit.

Example journal entries you can copy into your bookkeeping routine

Below are several examples that cover common scenarios. You can adapt them to your system’s account names.

Example 1: Sell a gift card for cash

Debit: Cash/Bank 100
Credit: Gift Card Liability 100

Example 2: Redeem part of a gift card

Debit: Gift Card Liability 40
Credit: Sales Revenue 40

Example 3: Redeem with tax included in the selling price

Debit: Gift Card Liability 40
Credit: Sales Revenue 33.33
Credit: Output Tax Payable 6.67

Example 4: Gift card sold via platform, you receive net proceeds

Debit: Bank 90
Debit: Commission Expense 10
Credit: Gift Card Liability 100

Example 5: Recognize breakage on an unused balance

Debit: Gift Card Liability 12
Credit: Breakage Income 12

Example 6: Refund an unredeemed gift card

Debit: Gift Card Liability 100
Credit: Bank/Cash 100

Reconciling your gift card liability so it doesn’t become a “mystery number”

Even if you book entries correctly, gift card liabilities often become messy because redemptions happen daily and are mixed into normal sales. A strong reconciliation routine prevents headaches.

A practical monthly reconciliation looks like this:

1) Start with the gift card liability balance from last month.
This should match what your books showed at the previous month-end.

2) Add new gift cards/vouchers sold in the month.
Use reports from your POS, e-commerce platform, or gift card provider.

3) Subtract gift cards/vouchers redeemed in the month.
Again, rely on system reports that show redemptions by date.

4) Subtract refunds of gift card sales (if any) and adjust for chargebacks.

5) Subtract any breakage recognized (if you record it monthly or quarterly).

6) The result should equal the ending outstanding balance per your gift card system.
If it doesn’t, you investigate differences: missing entries, incorrect mapping of tender types, system timing differences, or manual adjustments.

For many businesses, the best way to avoid discrepancies is to ensure your point-of-sale “gift card tender” is mapped to a liability reduction, not to revenue or cash. That way, daily sales postings naturally reduce the liability when gift cards are used.

How to record income when you issue vouchers for free (customer service gestures)

Sometimes you issue store credit or vouchers as a goodwill gesture—like a £20 voucher after a complaint. This is not cash received; it’s a future discount or credit you’ve granted. How you record it depends on what triggered it.

If it’s a refund replacement: Suppose a customer returns a £20 item and you issue £20 store credit instead of refunding cash. The original sale is reversed (or you record a return), and then you create a store credit liability. You haven’t “earned” income here; you’re simply changing how you’ll settle the obligation.

If it’s a goodwill credit without a return: You may record an expense or a contra-revenue item and a liability for store credit. Then, when the customer uses it, you reduce the liability and record the sale like normal, with the payment method being “store credit.”

The important point is not to double-count revenue. If you record revenue at redemption while also recording an expense at issuance, your net income effect might be correct, but your gross revenue could look inflated. Consider whether you want goodwill credits to reduce revenue (contra-revenue) or appear as an expense, and apply that consistently.

Service vouchers and appointment-based businesses

For salons, clinics, studios, coaches, and trades, vouchers often represent prepaid services. The same deferred revenue principle applies, but service delivery is clearer than product delivery: revenue is earned when the appointment is completed (or as sessions are delivered).

If you sell a “10-session package” voucher, you can treat the whole amount as deferred revenue at sale, then recognize revenue per session when completed. This may require a tracking spreadsheet or your booking system to ensure you know how many sessions have been delivered by month-end.

If sessions differ in value (for example, a package includes 6 standard sessions and 4 premium sessions), you may need an allocation method so revenue recognized per session reflects the relative standalone values. Many small businesses choose a simple average per session unless the difference is material.

Multi-purpose vs single-purpose vouchers: why the distinction matters

In practical terms, a multi-purpose voucher can be used for different items that might have different tax treatments or rates; a single-purpose voucher is tied to a specific taxable item or tax rate. This distinction can affect the timing of tax recognition in some jurisdictions, and it can influence how your systems should be configured.

Even if you don’t get into technical definitions, the operational takeaway is this: make sure your system treats gift cards as a payment method rather than as a product sale that triggers tax incorrectly. Where tax should be calculated at redemption, your POS should charge tax based on what’s purchased, not on the issuance of the stored value.

What small business owners get wrong most often

Here are the issues that most commonly cause incorrect income recording:

Recording gift card sales as revenue at issuance. This inflates sales and can distort taxes and reporting.

Using a “discount” function to process gift card redemptions. Discounts reduce revenue; gift cards are payments. Mixing these leads to underreported revenue and a liability that never reduces.

Not separating third-party commissions from gift card balances. If you only book what you receive in cash, you may understate the liability if customers can redeem the full face value.

Letting old balances pile up with no breakage policy. A liability that never changes becomes hard to interpret and reconcile.

Not reconciling to system reports. Gift cards are a system-driven number. Your books should tie to the system regularly, not once a year.

How to choose a breakage policy you can actually maintain

Breakage policies can get complicated, but you can choose something pragmatic and consistent. Here are three workable levels of sophistication:

Level 1: Expiry-based recognition. Recognize breakage only when vouchers expire or are legally released. Simple, but may leave big liabilities for a long time.

Level 2: Aged-balance recognition. Recognize breakage on balances that haven’t been used for a defined period (for example, 24 or 36 months), assuming you are permitted to do so and it matches customer terms. This reduces long-tail liabilities.

Level 3: Statistical recognition. Estimate breakage based on historical redemption patterns and recognize proportionally as redemptions occur. This is the most conceptually aligned with matching principles but requires good data.

Whatever you choose, document it in plain language: what data you use, how often you assess breakage, and what thresholds apply. That documentation will save time when you revisit the policy or if someone else takes over the books.

Worked example: a three-month gift card cycle

Let’s pull it together with a simple example for a business that sells and redeems gift cards over three months.

Month 1: You sell £1,000 of gift cards. No redemptions yet.
Entry: Debit Bank £1,000; Credit Gift Card Liability £1,000.
End of Month 1: Liability = £1,000; Revenue from gift cards = £0.

Month 2: Customers redeem £600 of those gift cards for goods/services.
Entry: Debit Gift Card Liability £600; Credit Sales Revenue £600 (plus tax split if relevant).
End of Month 2: Liability = £400; Revenue recognized from redemptions = £600.

Month 3: Customers redeem £300 more. The remaining £100 becomes very old and you decide to recognize it as breakage based on your policy.
Redemption entry: Debit Gift Card Liability £300; Credit Sales Revenue £300.
Breakage entry: Debit Gift Card Liability £100; Credit Breakage Income £100.
End of Month 3: Liability = £0; Total revenue recognized = £900 sales + £100 breakage.

Notice how the profit and loss statement reflects when you delivered goods/services, rather than when you collected cash. That’s the heart of recording income correctly.

Systems tips: making your POS and accounting software behave

The best bookkeeping policy in the world won’t help if your systems post transactions incorrectly. Here are practical configuration tips that reduce manual work:

Map gift card sales to a liability account. When you sell a gift card as an item, the “income account” behind that item should be a liability account, not sales revenue.

Map gift card redemptions as a tender/payment method. When a gift card is used, it should reduce the gift card liability, not create a discount or a negative line item.

Use a clearing account for processors. If deposits are batched and fees are netted, a clearing account makes it easier to match deposits to sales and isolate fees.

Keep one source of truth for outstanding balances. Your gift card platform or POS should be the authoritative record. Your books should reconcile to it regularly.

Lock down manual journal entries. Gift cards are high-volume and system-driven. Too many manual adjustments can create drift unless they’re carefully documented and tied to a specific reconciliation issue.

Internal controls: preventing fraud and errors

Gift cards can be targets for fraud because they are a cash equivalent. Even small businesses benefit from basic controls:

• Limit who can issue gift cards and who can apply manual balance adjustments.
• Require manager approval for refunds to gift card balances.
• Review gift card activity reports for unusual patterns (large manual adjustments, many small redemptions, repeated voids).
• Reconcile outstanding balances monthly and investigate differences promptly.
• Keep clear policies on expiry, replacement, and lost cards.

These practices help keep your liability accurate and reduce unpleasant surprises.

Common questions and clear answers

Do I record gift card sales as income?
Usually, you record them as a liability when sold and recognize income when redeemed (or as breakage when applicable).

What if the customer never uses the gift card?
That becomes breakage. You can recognize it as income when it becomes remote that it will be redeemed or when expiry/legal release occurs, depending on your policy and obligations.

What if I sell vouchers at a discount?
You can either recognize revenue proportionally based on the discounted proceeds as redemptions occur, or recognize face value at redemption and track the discount as an expense/contra-revenue. Pick a consistent approach.

How do I handle gift card fees?
Record the fee as an expense (or reduction of proceeds) and ensure the liability reflects what customers can redeem, not merely the cash you received, if you owe the full face value.

A simple checklist you can use each month

1) Pull a report of gift cards/vouchers sold this month (by face value and proceeds received).
2) Pull a report of redemptions this month (by value redeemed).
3) Pull a report of refunds/chargebacks affecting gift cards/vouchers.
4) Post or confirm entries: sales to liability, redemptions to revenue, refunds to reduce liability, fees to expenses.
5) Reconcile the ending liability to the outstanding balance report from your system.
6) Review aged balances and apply your breakage policy if scheduled.
7) Document any manual adjustments with a short explanation and supporting report.

Wrapping up: the cleanest way to record income from gift cards or vouchers

The cleanest, most defensible method is to treat gift cards and prepaid vouchers as a liability when sold and recognize income when redeemed—because that is when you actually deliver the goods or services. From there, handle exceptions systematically: discounts through clear allocation policies, third-party channels by following settlement flows, refunds by reversing obligations, and breakage through a documented approach that you can apply consistently.

If you build your chart of accounts properly, map your POS correctly, and reconcile to your gift card system monthly, gift cards and vouchers become routine rather than stressful. More importantly, your financial statements will reflect reality: revenue when earned, liabilities when owed, and breakage recognized in a controlled, transparent way.