Remember when a gift card is purchased, your business should not record revenue - it is not income. Record it as a liability instead. When the gift card is redeemed by the customer for goods or services, you reduce your company’s gift card liability and record the sale as revenue.
We recommend creating clearing accounts for each connected payment provider. A clearing account is a bank account configured within Xero in the name of your payment provider. A good rule of thumb is to create a clearing account in Xero for each provider that takes funds from your customer and makes deposits to your business.
Create a liability account to store the sale of gift cards to customers. To set up a liability account, go to Settings > Chart of Accounts > Liabilities tab > Add account. You'll want to create a new account with the following settings:
- Account Type - Current Liabilities
- Account Number - assign an identification number to this account
- Account Name - Gift Cards Payable
- TAX - BAS Excluded
- Check “Show on Dashboard Watchlist”
- Check “Enable payments to this account”
- Click “Save”
In order to properly book the sale of gift cards, create a new product item in Xero. To set up a new item, go to Business Menu > Products and Services>New Item>Enter Code and Name>Check purchase and sell>Save You'll want to create a new product with the following settings:
- Code - assign an item code
- Name - Gift Cards
- Cost - 0.00
- Purchase account - Select the default chart of accounts code for the cost incurred when buying the item
- Sale Price - 0.00
- Sales account - Gift Cards Payable
- Tax rate - 0 (tax is collected during redemption as a normal sale)
If you want to reconcile the liability balance against the individual gift cards outstanding, you will need to do it outside Xero in a spreadsheet.
Make a note of the gift card number or customer name in the spreadsheet. Consider selecting "Contact Level 2" from the Export Preferences menu in Greenback so that you have the customer name automatically associated with the sales transaction.
When the gift card is sold, map the transaction to the Gift Card liability account.
When the gift card is redeemed, use the gift card item to offset the purchase. If there is a balance due on the invoice after the gift card is applied, collect payment as you normally would.
When the gift card is redeemed, remember the sale is taxable.
Mark the ‘payment’ of the invoice as being from the gift card transaction.
Mark the value of the gift card as a payment against the total invoice.
For additional conditions or questions regarding the sale and/or redemption of gift cards, including e-gift cards, please refer to your region's commerce-governing body.