How to Account for Customer's Purchase of Apparel Using Gift Card by MIAD Corp?
What would be the appropriate journal entry by MIAD to account for the customer's purchase of the apparel in February?
Answer:
When a customer purchases apparel using a gift card, MIAD Corp. needs to make the appropriate journal entry to account for this transaction. This involves recognizing the revenue earned from the sale of the apparel as well as adjusting the liability related to the gift card.
According to Generally Accepted Accounting Principles (GAAP), when a gift card is sold, the entry to be passed in the books of accounts is not treated as a sale entry. Instead, the business should debit a cash account and credit a liability account under a different name, such as gift card outstanding or deferred revenue.
When the customer returns to spend part of the gift card to purchase team apparel, MIAD Corp. should debit earned income for the amount of the sale. In this case, the customer spent $200, so the journal entry would be:
Debit: Earned Income $200
Credit: Deferred Revenue (Gift Card Liability) $200
By debiting earned income and crediting deferred revenue, MIAD Corp. records the revenue from the apparel sale and reduces the liability associated with the gift card used by the customer. This ensures that the financial statements accurately reflect the company's financial position and performance.
Understanding Sales Revenue Recognition:
Sales revenue recognition is an important accounting principle that governs how and when revenue should be recognized in the financial statements. The accrual concept, a fundamental accounting principle, requires that revenue should be recognized when it is earned, regardless of when cash is received.
When MIAD Corp. sells a gift card, it receives cash but does not recognize the revenue from the sale at that time. Instead, the cash received is treated as a liability (deferred revenue) until the customer uses the gift card to make a purchase. Once the customer makes a purchase using the gift card, MIAD Corp. can then recognize the revenue earned from that sale.
The journal entry to account for the customer's purchase of the team apparel in February involves debiting earned income for the amount of the sale and crediting the deferred revenue account related to the gift card. This ensures that the financial statements accurately reflect the revenue earned and the corresponding reduction in the liability associated with the gift card.
Properly accounting for customer purchases made using gift cards is essential for ensuring the accuracy and transparency of financial reporting. MIAD Corp. must follow GAAP guidelines and make the necessary journal entries to reflect the revenue earned and the corresponding changes in liabilities resulting from gift card transactions.