Are your restaurant’s promo cards being accounted for properly?

• November 4, 2021
• Karen Blacik

Today we have a guest blogger – Paul Unger. He is a Director in our Assurance practice and hails from Southern California in our Pasadena office.

With the holidays approaching, interest in gift cards will naturally increase. Since gift cards are great for restaurants—you receive cash up front and incentivize customers to return –  competition for those consumer dollars can be intense. One way restaurants compete is with the “promo card” where customers buy a certain dollar amount of gift cards and get an additional card of lesser value at no cost to them.

Restaurants should ensure they are ready to account for these cards correctly.

Issuing promo cards

The common misconception is to record promo cards as a liability and marketing expense as soon as they are given out…but this overstates liabilities and distorts expenses. You haven’t received anything of value for the promo card so conceptually you cannot have a liability, and recording the expense in the period you give them out violates the matching principle and overlooks the affect they will have on your food cost and gross margin.

At issuance, promo cards should be recorded as both a liability and contra-liability. For example, if your restaurant sells gift cards with a value of $50 and the customer receives a $10 promo card, you record the following entry;

By recording these transactions as a gross up liability/contra-liability, you avoid overstating your liabilities, and defer recognition to the period the promo cards are used, matching their redemption to the revenue recognition their usage triggers.

Redeeming promo cards

Care should also be taken when recording the redemption of promo cards. Having recorded the promo card’s issuance as above, an easy mistake to make is to record a marketing expense for the full amount of the promo card redeemed. But this can distort the affect their redemption has on your sales, cost of sales, and gross margin, causing headaches when trying to analyze your costs, menu engineering, and overall operations.

Promo card redemptions should be recorded to sales discounts rather than to marketing expense because the restaurant is providing goods & services and receiving less than full price in exchange, and the promo cards generally represent cash that never comes into the business, rather than cash that flows out. COGS should be split into discrete accounts, proportionate to the promo card redemption amount to the sales amount.

If the $10 promo card from above were redeemed with a $100 sale, you would record the following entry (assume a 30% COGS);

Cash	$90
Sales discount	$10
COGS – regular food & beverage	$27
COGS – Promo card	$3
Gift Card liability	$10
Sales Revenue		$100
Inventory		$30
Gift Card Contra-liability (promo card)		$10

Just as with comps and discounts, promo cards are contra revenue because if not, sales will be overstated and can expose your restaurant to incorrect sales tax liabilities and incorrect variable rent expense. The above example avoids overstating sales and marketing expense.

Splitting the COGS will allow for a more robust analysis; the regular food and beverage amount is still 30% of the net sales ($90), preserving the theoretical COGS for actual vs. theoretical comparisons, and having the promo card portion separately identifiable will make it quick and easy to see how much they are affecting your gross margin.

Retiring expired promo cards

Finally, most, if not all, promo cards will have an expiration date. The above example does not take into consideration recording of breakage.  If you have reliable historical data, breakage should be applied and recorded in a consistent manner throughout the year. Clearing your books for promo cards that go unused is straightforward; simply reduce both the Gift Card liability and contra‑liability accounts for the outstanding, unused amount. If the $10 promo card is never used, you would record the following entry;

Gift Card liability	$10
Gift Card Contra-liability (promo card)		$10

                                                                       

Considering many customers spend more than a gift cards’ face value, promo cards can be a great way to increase both cash and future sales; just make sure they’re also working for you by delivering accurate financial reporting at each stage of the way.

Author: Paul Unger

---

, Uncategorized | Comments Off on Are your restaurant’s promo cards being accounted for properly?