You sell a $100 gift card on your Shopify store. The customer pays you $100, and the money eventually reaches your bank account. Did you just make a $100 sale?
Not yet.
You have the cash, but you also owe the customer $100 of merchandise. Until the customer uses the gift card, that money generally represents a liability rather than revenue. This is one of those areas where looking only at deposits can give an ecommerce owner the wrong answer.
How Should a Gift Card Sale Be Recorded?
When you sell a gift card, you generally record the cash and create a gift card liability. Revenue is recorded later when the customer uses the gift card to purchase a product.
For example, assume you sell $10,000 of gift cards during December. If only $2,000 are redeemed before year-end, you generally would not report the entire $10,000 as December sales for financial reporting purposes.
The unused portion remains a liability because you still owe those customers products.
This becomes especially important during the holidays. An ecommerce business may receive a lot of cash from gift card sales in November and December even though the related product sales will not occur until the following year.
What Happens When the Gift Card Is Used?
When the customer uses the gift card, the accounting starts to look more like a normal ecommerce sale.
The gift card liability is reduced, and revenue is recognized for the product sold. The related inventory and cost of goods sold also need to be recorded.
That gives you a much better picture of what actually happened. Selling the gift card brought in cash. Redeeming it generated the product sale.
Those are two different events.
Store Credits Create a Similar Problem
Store credits can create another accounting issue.
Assume a customer returns a $200 product, but instead of issuing a cash refund, you give the customer a $200 store credit. Your business now owes that customer $200 toward a future purchase.
That obligation needs to be tracked.
If store credits are not recorded correctly, revenue and liabilities can become distorted. The problem gets worse when you have a large volume of returns or credits.
Preorders Can Also Put Cash Ahead of Revenue
Preorders can create a similar situation. A customer may pay today for a product that will not ship for several weeks or months.
Again, having the cash does not necessarily mean you have earned the revenue.
Depending on the facts, that payment may need to remain a liability until the business satisfies its obligation to the customer. For an ecommerce company with a major product launch, the difference can be significant.
You could have hundreds of thousands of dollars in the bank while still owing customers the products they purchased.
Why This Matters for Ecommerce Accounting
Gift cards, store credits and preorders all demonstrate why ecommerce accounting cannot simply follow bank deposits.
Money can enter your bank account before you earn it. Money can also remain owed to customers long after the original transaction occurred.
Your accounting needs to separate those events.
Otherwise, a strong month of gift card sales or preorders can make revenue look better than it really is. Later, when customers redeem those balances and products ship, the accounting can move in the opposite direction.
Keep Track of What You Still Owe Customers
Gift cards are not particularly complicated when they are tracked correctly. The problems usually start when nobody reconciles the outstanding balance.
Your ecommerce platform may tell you how much remains unused. Your accounting system should have a liability that makes sense compared with that information.
The same concept applies to store credits and certain customer deposits.
Cash in the bank is obviously important. But it does not always tell you how much revenue you earned. Sometimes that cash simply means you still owe somebody something.