Why gift cards are not revenue.
A gift card sale is not earned revenue. The customer paid for nothing yet. They have a claim on you for merchandise of equivalent value. Until they redeem the card, you owe goods. Recognizing the gift card sale as revenue at sale time inflates current-period income and creates a cliff later when the merchandise actually leaves your shelves.
Under both IFRS 15 and US GAAP ASC 606, the obligation to deliver goods means the receipt is deferred revenue. It sits on the balance sheet as a liability called Gift card liability. Revenue is recognized only on redemption, when the performance obligation is satisfied. This is non-negotiable from an audit perspective.
The journal at gift card sale.
On a £50 Shopify gift card sale, the entry is debit Shopify clearing £50, credit Gift card liability £50. No revenue line, no COGS, no inventory movement. The cash flowed through the same payout as everything else, but the credit lands on a liability account rather than a sales account.
The Shopify payout report flags gift card sales separately. If you reconcile payouts only against the order list and ignore the gift card line, you will end up booking gift cards into revenue and miss this entry entirely. Nonari flags gift card sales at ingest and posts to the liability account automatically.
Redemption mechanics.
A customer redeems £32 of the £50 card against an order with £38 of merchandise plus £1 shipping. The journal is debit Gift card liability £32, debit Shopify clearing £7 (the cash topup), credit Sales £38, credit Shipping income £1. COGS posts as normal at WAC, debit COGS, credit inventory.
The remaining £18 stays as a liability against that customer’s gift card balance. Critically, the Sales line is full price £38; the gift card is treated as a payment method, not a discount. Booking it as a discount understates revenue and skews discount-related KPIs.
Breakage, the unredeemed remainder.
A portion of issued gift cards is never redeemed. Industry data suggests 5-15% of card value depending on segment. This is breakage. Once it becomes probable that the remaining balance will not be redeemed, it can be recognized as income, but the timing and method matter.
The cleanest method is the redemption-pattern method: estimate the percentage of cards that will go unredeemed based on history, then recognize that fraction of breakage proportional to actual redemption activity. If 10% of cards are expected to be unredeemed and a customer redeemed 50% of their card, recognize 5% of the original card value as breakage in that period.
- Estimate unredeemed percentage from at least 12 months of history
- Recognize breakage proportional to redemption, not at issuance
- Review and adjust the estimate annually
- Disclose the breakage policy in financial statements if material
Consumer protection and expiry rules.
Many jurisdictions restrict gift card expiry. In the US, the federal CARD Act bars expiry under 5 years; several states extend further. The UK has no fixed expiry rule but disclosed terms apply. The EU consumer rights directive treats prepaid balances as customer property. Australia caps mandatory minimum expiry at 3 years for most consumer gift cards.
Conservative practice: keep the liability on the books for the full disclosed term plus a buffer. Nonari tracks gift card balances per branch and per currency so a UK-issued card stays on the UK branch’s books in GBP, separate from a USD card on the US branch.
Promotional gift cards are different.
A gift card given away as a promotion (a free £10 credit for completing a survey, for instance) is not a deferred revenue item because no cash was received. It is a customer incentive. The correct treatment is to wait until redemption, then recognize the redemption as a discount against the redeeming order, not as a sale.
On a £30 order with £10 promo card applied, revenue is £20, and a marketing expense (cost of the promo) is also £10 if you choose to disclose the promo separately. Mixing promotional cards into the gift card liability inflates the liability and confuses redemption math. Keep them in distinct accounts.
Reconciliation against Shopify’s gift card report.
Shopify exposes a gift card report showing outstanding balances at any point. At month end, the sum of outstanding balances should equal the Gift card liability account balance. Differences mean a missed sale entry, a missed redemption entry, or a breakage adjustment that has not yet been posted.
If your books show a higher balance than Shopify reports, you may have failed to post a redemption. If lower, you may have missed a sale. The most common cause is recognizing breakage too aggressively. Nonari runs this reconciliation automatically on close so the liability balance is always defensible.
Where Nonari fits.
Nonari treats gift cards as a separate Shopify event class. The webhook for gift card sale posts to Gift card liability instead of Sales. The webhook for redemption splits the order between liability draw and cash, with COGS posting as normal at WAC. Breakage runs as a configurable monthly process based on your redemption history.
Because each storefront is its own branch, gift cards on a USD storefront and a GBP storefront keep their own currencies and balances on the books. The aggregate liability is reportable in your functional currency through the same FX revaluation that applies to other foreign-currency balances.