When Can I Recognize Income As Revenue? [Question Zero]
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It would matter if you chose "cash" or "accrual" accounting as your method of accounting reported. With cash accounting, revenue is recognized when cash is received. With accrual accounting, revenue is recognized when the earning process is completed and delivery of service is assured. It is good to look at your total sales and how they are derived to decide which type of accounting is appropriate for your business.
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More answers from Brian
Eddy Company, LLC's Services and Events
Hi Brian,
I wanted to follow up on your response because in my experience with gift cards it doesn't seem to matter if it's cash or accrual accounting with regard to tax authorities; with all the customers I've seen come through our service with gift cards we have treated them the same whether cash or accrual. I wanted to know if you had a different experience with them in your own practice.
Hi Aaron,
I think I may be able to answer that question for you. There is a difference between the recording of the gift certificate in the general ledger vs. when it is recognized as income.
Under both accounting methods, the gift card is recorded in the general ledger as an asset to the cash account of the balance sheet and a current liability.
The revenue recognition does depend on your accounting method. If it is cash, the revenue is recorded when the gift certificate is purchased and the liability is removed when it is used, i.e. the taxable event is when the gift card is sold. If it is accrual, no further action is taken until the gift certificate is used. The taxable event occurs later when the gift card is used. Please note that the IRS does have special ways that it treats gift certificates under the accrual method. I'd recommend reviewing Rev. Proc. 2011-18.