How to account to Gift Cards on Xero

Gift cards are different to normal sales because they represent a future promise to perform a service / provide a product of the gift holder's choice.

They also don't have GST on them when issued.

Here, we explain how to treat gift cards correctly in your Xero file.

What's so different about gift cards?

Gift cards are different to a normal 'sale' item because you're saying to somebody that you owe them a product or a service to the value of the gift card to be redeemed within a certain period of time.

They also don't have GST reported against them (until the actual 'sale' occurs - being the performance of the service or the sale of the product).

It's best to think about a Gift Card as an IOU to a customer for a future sale of a product or service.

What do we need to do in order to  account for Gift Cards correctly?

• Setup a "Gift Card" item in your Chart of Accounts
• Selling a Gift Card
• Redeeming a Gift Card

Gift cards are a smart sales strategy

Gift cards are a smart sales strategy - especially for times such as Christmas, Valentines, Mothers Day, Fathers Day. However, they can be a bit tricky to account for if you don't know how.

This is because they aren't like an ordinary sales transaction - because you've not actually sold a product or a service.

You've sold a promise to deliver a product or service in the future to the Gift Card holder.

If you treated the Sale of a Gift Card the same way as an ordinary sales transaction, you'd end up double counting your sales (and reporting more profit to the Tax Man - ouch!).

If you follow the following three steps when using Gift Cards in your Xero file, you'll be on track to make sure you don't double count the money AND that your BAS report will be performed correctly.

Step 1: Setup a "Gift Card" item in your Chart of Accounts

First of all, we need to create a special Chart of Account item under Current Liabilities.

You can create a new Chart of Account item by:

1. Select the Settings tab
2. From the dropdown select either "General Settings" or, if you have the favourite already linked, the "Chart of Accounts"
3. If you clicked, "General Settings" you'll find the "Chart of Accounts" blue link under the heading "Organisation
4. When the list of Accounts appears on your screen, click on the "Liabilities tab".  Review the numbered list to find an available number, and select"Add Account" (on the top left of your screen).
5. A new pop up will appear, and you'll want to complete the fields as follows:

• Account Type - "Current Liabilities"
• Account Number - the number you chose, in this example, 810
• Account Name - "Gift Cards"
• Tax - "BAS Excluded"
• Tick the "Show on Dashboard Watchlist"
• Tick the "Enable payments to this account"
• Click Save

Refer below to how your screens will look once you've clicked on "Add Account" within Xero:

Now you've created your Gift Card Chart of Account code, you can start selling Gift Cards.

Step 2: Selling a Gift Card

Remember, Gift Cards aren't an ordinary sale - you've not yet performed a service or sold a product. So when you make a "Sale" item in Xero, you need to ensure you don't charge GST.

1. Create a New Sales item (as per normal)
2. The Description - you might want to add the Gift Card Number and who it is addressed to
3. Add the quantity and Unit Price
4. Select the new Account "Gift Cards"
5. Ensure that the tax on the Sale item is BAS excluded
6. Mark the payment made for the Gift Card as per normal (eg EFTPOS / Cash payment etc).

Refer below to the sample Sales item:

Step 3: Redeeming a Gift Card

When the customer who has been given the Gift Card comes to redeem it for a product or service, we need to create our Sale item (for the product or service) with the relevant GST on the sale. We then mark the 'payment' of the invoice as being from the Gift Card Transaction.

This will reduce the overall liability owed for Gift Cards, and also, process the Sales invoice (for the good or service) correctly, without double counting sales (because of the Gift Card).

1. Create a New Sales invoice for the Product or Service sold (just like normal)
2. Approve the Sales invoice
3. Mark off the value of the Gift Card as a payment against the total invoice (see below example)

4. Mark off the remaining payment of funds (if required) as per normal (eg EFTPOS / CASH)

Once you've followed the above procedures, your Gift Card should be treated correctly within the Xero file and your quarterly BAS statement.

Do you still have questions?

If you've still got questions about how to process Gift Cards in your Xero file, then please, do send us an email to: support@catalystplus.com.au and we'll be able to help you resolve your query.