Introduction: Gift card breakage
Breakage is an accounting term that is used to show that gift cards sold out but have not been redeemed. Consumers are fond of gift cards because they are more “handy” when one is in a dilemma of what to give to a special individual. They are also practical for people who are at a distance. Employers also give gift cards to their employees as forms of incentives and awards. The accounting of the gift cards is a major challenge for retailers, the unresolved problems that arise from the report of gift cards sales and the unredeemed gift cards result in accounting problems such as the standards for revenue recognition plus the recognition of special items. This is because the gift cards, provide the purchasers and the gift card recipients a wide range of choices for products but restrict these choices to a limited number of retail service providers. This purchaser merchant exchange is a provision of economic justification that retailers offer. As a result, the retailers promote the sale of gift cards due to the economic benefits out of the sales (KILE 3).
Complex Accounting Issue
Breakage is a complex accounting issue, as a result, one would have a question on the following; gift card suppliers, auditors, and financial statement users. This is due to the following facts; companies and organizations get profits from the gift cards because individuals frequently spend more than the actual amount of money on the card. Therefore, card issuers make profits via renewal of fees in cases where the card has an expiration date. In addition, some of the consumers do not even use their cards at all, this leaves a balance that is either disregarded or forgotten, in other cases the consumers lose the card even before they use them. All these situations lead to the summing up of substantial amounts (KILE 5).
Cost of Accounting Gift Cards
The process of accounting for the gift cards that have not been used can be cumbersome and costly in my own opinion, card programs have a cost on retailers especially when the balance that remains on the card is outstanding for many years. It is, therefore, a subject of the accounting issues and the practicality issues as well in the operating of the issuing of the gift cards. The longer the gift cards take unclaimed the longer the outstanding balance gets to remain on the book of the retailer. The second significant and potential cost of the gift cards is fraud. Any supplier of gift cards can easily be a victim of fraud; these are external and internal frauds. An external fraud includes such as a shoplifter who steals them and simply sells them over the Internet or tries to swap them. A form of internal accounting fraud involves a fellow employee in an organization that supplies these cards. For instance, an employee can pretend that the card is empty or deactivated, he/she persuades the customer to leave the card since it is worthless. Alternatively, the employee can exchange the customers’ card with one that has no value on it and keep the one with value since it is of economic benefit. Gift cards are increasingly becoming a source of income for some companies, and the accounting literature provides no precise, convincing guidance for accounting for the gift cards revenues (KILE 4).