Appropriately accounting for gift cards is essential for restaurant groups because each store P&L needs to report its share of sales to measure performance accurately, and the balance sheet of each store needs to show the amounts it owes and is owed as a result of selling and redeeming other store gift cards respectively. This is even more important in a franchise or restaurant group with different ownership structures for each store. Yet, this is frequently overlooked by accountants and bookkeepers because it requires setup time, critical thinking, and modernized accounting systems.
How you account for gift cards in a restaurant group depends on whether you operate a franchise, or a chain of your own concepts (aka restaurant chain). The ownership structure of each store and the transferability of gift cards between stores in a chain have a considerable impact as well.
In this article, we will outline how and when to account for gift cards in a restaurant group so that you can accurately measure performance and amounts owed between stores or “corporate”. Before reading this article, we suggest reading How to Optimize Restaurant Gift Card Accounting and Bookkeeping, hosted by Toast, as a primer on how gift cards are presented on the financials.
Accounting for Gift Cards in a Restaurant Franchise Group
In a franchise model, such as Five Guys, gift card redemptions are reimbursed by the franchisor (aka “corporate”), and gift card sales are due to the franchisor. Gift cards redeemed need to be tracked and reported as receivable on the balance sheet of each store, and gift cards sold need to be tracked and reported as payable on the balance sheet of each store. Here is how it works:
- Store 1 sells a gift card for $50 and receives $50 from customer X. Store 1 owes corporate $50.
- Store 1:
- Cash increases by $50
- Due to Corporate liability increases $50
- Corporate:
- Gift Card Liability increases $50
- Due from Store 1 asset increases $50
- Store 1:
- Customer redeems $15 of the $50 gift card at store 2 to buy a burger.
- Store 2:
- Food Sales increases by $15
- Due from Corporate asset increases $15
- Corporate:
- Gift Card Liability decreases $15
- Due to Store 2 liability increases $15
- Store 2:
- Corporate reimburses $15 to store 2.
- Store 2:
- Cash increases by $15
- Due from Corporate asset decreases $15
- Corporate:
- Cash decreases by $15
- Due to Store 2 liability decreases $15
- Store 2:
- Store 1 transfers $50 to corporate.
- Store 1:
- Cash decreases by $50
- Due to Corporate liability decreases $50
- Corporate:
- Cash increases by $50
- Due from Store 1 asset decreases $50
- Store 1:
The net effect of all this is that store 2 recognizes sales of $15 and receives $15 in cash. The P&L of store 1 is not affected because it serves as a conduit for collecting gift card sales proceeds and sending them to corporate so that corporate can allocate between franchisees who service the payment.
Accounting for Gift Cards in a Restaurant Chain
Non-franchise restaurant groups come in all shapes and sizes. It might be a single concept with multiple stores owned by different investors, multiple concepts owned by one holding company, or some version of both. The concept(s) is irrelevant for gift card accounting. Instead, it’s the ownership structure and transferability of gift cards between stores that matter. If gift cards cannot be transferred between stores, you can use the single-store method outlined here. If gift cards can be transferred between stores, then the ownership structure drives the financial reporting for gift cards. We will demonstrate how to account for gift cards in different restaurant chain ownership structures below.
Chain with Different Ownership
With Corporate Entity
If the restaurant group has a holding company, management company, or other corporate entity, you can use an approach like that of franchises, but you will also need to track amounts owed to the stores at the corporate level. Let’s see this in action:
- Store 1 sells a gift card for $50 and receives $50 from customer.
- Store 1:
- Cash increases by $50
- Due to Corporate liability increases $50
- Corporate:
- Due from Store 1 asset increases $50
- Gift Card Liability increases $50
- Store 1:
- Customer redeems $15 of the $50 gift card at store 2 to buy a burger.
- Store 2:
- Food sales increase $15
- Due from Corporate asset increases $15
- Corporate:
- Due to Store 2 liability increases $15
- Store 2:
- Corporate transfers $15 to store 2.
- Store 2:
- Cash increases by $15
- Due from Corporate asset decreases $15
- Corporate:
- Cash decreases by $15
- Due to Store 2 liability decreases $15
- Store 2:
- Store 1 transfers $15 to corporate.
- Store 1:
- Cash decreases by $15
- Due to Corporate liability decreases $15
- Corporate:
- Cash increases $15
- Due from Store 1 asset decreases $15
- Store 1:
The net effect of all this is that store 2 recognizes sales of $15 and receives $15 in cash. The P&Ls of store 1 and the corporate entity are not affected because they merely serve as conduits for getting store 2’s cash to the right place.
Without Corporate Entity
If the restaurant group does not have a holding company/management company/other corporate entity, the intercompany gift cards must be tracked by each store. Let’s see this in action.
- Store 1 sells a gift card for $50 and receives $50 from customer.
- Store 1:
- Cash increases by $50
- Gift Card Liability increases $50
- Store 1:
- Customer redeems $15 of the $50 gift card at store 2 to buy a burger.
- Store 2:
- Food sales increase $15
- Due from Store 1 asset increases $15
- Store 1:
- Gift Card Liability decreases $15
- Due to Store 2 liability increases $15
- Store 2:
- Store 1 transfers $15 to Store 2.
- Store 1:
- Cash decreases by $15
- Due to Store 2 liability decreases $15
- Store 2:
- Cash increases by $15
- Due from Store 1 asset decreases $15
- Store 1:
The net effect of all this is that store 2 recognizes sales of $15 and receives $15 in cash. The P&L of store 1 is not affected, but it holds $35 in cash as a gift card liability that could be redeemed at its store or any other store in the group.
As you can see, this methodology allows each store to track how much is owed from other stores so that the ownership of each store is confident they are receiving their fair share of sales.
Chain with Shared Ownership
In a restaurant chain with shared ownership across all stores, tracking gift card sales owed from other stores is less critical. You can use either use any of the methods described above if you want to track amounts owed between the stores for gift card sales, or you can account for gift cards the same way you do for a single restaurant, as discussed here. Let us show you how this plays out and why it’s so much easier:
- Store 1 sells a gift card for $50 and receives $50 from customer.
- Store 1:
- Cash increases by $50
- Gift Card Liability increases $50
- Store 1:
- Customer redeems $15 of the $50 gift card at store 2 to buy a burger.
- Store 2:
- Food Sales increase $15
- Gift Card Liability decreases $15
- Store 1:
- No entry, consolidate due to/from between stores and gift card liability accounts at period end.
- Store 2:
The net effect is that the books for store 1 will show a gift card liability of $50, while the books for store 2 will show a negative $15 gift card liability, but since the ownership and balance sheet for all these stores are consolidated, then the overall net gift card liability will still show $35. This is fine because the store 2 P&L reports sales of $15.
Accounting Implementation
To achieve the appropriate gift card reporting for your restaurant group, you need to update and automate your daily sales entries to reflect the appropriate methodology above, and update your accounting procedures to reflect any reporting adjustments needed as a result. It may seem strenuous, but with the right technology and accounting team, this process is realistic and scalable. At The Fork CPAs, we implement this process for our restaurant group clients to ensure the appropriate gift card reporting across all entities. Schedule a call with us to determine exactly how accounting for gift cards in a restaurant group looks for your operations, or to get started with the Fork CPAs’ services.
