You greet your customers as they arrive at your restaurant.  For you, it’s another busy evening of providing tasty food and drink, top-notch service and a relaxed, enjoyable atmosphere in your restaurant.  Not too long into the evening you hear the unfortunate, yet familiar, sound of dishes and glasses falling to the floor and breaking into a million pieces.  Your server fumbled a tray clearing a table.  While some folks in the restaurant  industry might think of this scenario when they hear the word “breakage,” in this blog, we are will be discussing  the type of “breakage” in the industry that may add revenue to your profit and loss statement rather than result in an added expense.

If you search for the meaning of “breakage” on the Internet, the definition may read as follows:  “A term used in accounting to indicate gift cards that have been sold but never redeemed.”   And, like the fumbled tray of dishes, breakage in terms of gift cards require someone in your organization to do some “clean-up” work.

Proceeds from sales of gift cards are typically recorded on company financial statements as deferred revenue at the time of issuance and later recognized as revenue when the cards are redeemed.*  So, what do restaurants do with the build-up of deferred revenue from unredeemed gift cards that appear to have a remote likelihood of being used?

Many restaurants estimate and recognize gift card breakage income based on their historical redemption patterns.  Restaurants analyze their specific patterns of redemption and use the results to determine the amount of the unredeemed gift card balance that is estimated to have a remote probability of being redeemed.  The next question to consider is how this income should be recognized on your financial statements.  Some restaurants report the breakage amount within net sales while others show it elsewhere.

Keep in mind that the various states each have their own unique set of laws related to gift cards.  Some of these laws require expired gift cards to escheat to the state similar to other unclaimed property.  It is important to understand the specific rules within the state that you operate before making a determination as to how your restaurant will recognize gift card breakage on your financial statements.

* The tax treatment of gift card sales is different.