Why You Should Track Gift Cards Even on Cash-Basis Accounting

Gift cards are a staple in paint-your-own pottery and other creative studios. They provide upfront cash, boost holiday sales, and encourage repeat customers. But if you’re operating on cash-basis accounting (as most small studios do), you might have been told that you don’t need to track gift cards as liabilities. While that’s true from a tax perspective, it doesn’t mean you can ignore them. Here’s why tracking gift cards still matters.

Cash Basis vs. Accrual: What the IRS Requires

• Cash basis: Income is recorded when money is received, and expenses are recorded when money is paid. That means when you sell a gift card, you immediately record it as income.

• Accrual basis: Income is recorded when it’s earned, and expenses when they’re incurred. Under this method, gift card sales are treated as a liability until redeemed, because the studio hasn’t yet delivered the product/service.

👉 The IRS requires accrual accounting for businesses with average annual gross receipts over $30 million (as of 2024). Most independent studios fall well below this threshold, so cash basis is acceptable.

Why Tracking Gift Cards Still Matters

Even though cash-basis accounting doesn’t require you to track outstanding gift cards as liabilities, here are three key reasons you should:

1. Operational InsightWithout tracking, it’s easy to inflate your revenue picture. December sales may look amazing due to heavy gift card sales, while January looks weak because most redemptions don’t count as “new” income. Tracking outstanding balances gives you a clearer sense of real-time business performance.

2. Customer ExperienceGuests expect to redeem their gift cards smoothly. If you don’t have accurate records, you risk confusion, frustration, or even turning away loyal customers.

3. Business Valuation & SaleIf you ever sell your studio, those outstanding gift cards represent real obligations. Customers will want to use them after the sale, and you (not the new owner) are responsible for covering the cost unless you’ve negotiated otherwise. A good practice is to create a written agreement where you either:

   • Reimburse the new owner for redemptions for a set period (6–12 months), or

   • Discount the sale price of your business by the total unredeemed gift card liability.

   If you don’t track gift cards, you won’t know what that outstanding amount is — leaving you in a vulnerable negotiating position.

How to Track Gift Cards Effectively

• Use your POS system: Many systems can track outstanding balances automatically.

• Supplement with a spreadsheet: If your POS doesn’t handle this well, maintain a simple log of issued cards, redemption dates, and balances.

• Review monthly: Reconcile outstanding balances so you always know what’s “out there.”

Bottom Line

On cash basis, gift cards don’t need to be recorded as liabilities for IRS purposes. But from a management, customer service, and business value perspective, tracking them is critical. Think of it as a safety net: it helps you run smarter today and protects you tomorrow if you ever sell your studio.