Americans are sitting on roughly $23 billion in unused gift cards. About 43% of adults have at least one card gathering dust in a drawer, and the average person holds around $244 in balances they may never spend. For the businesses that sold those cards, that pile of forgotten plastic is not free money sitting in a register—it is a liability on the balance sheet, and turning it into revenue is one of the trickiest pieces of accounting a retailer or restaurant has to get right.
This is the world of breakage: the portion of gift card value that customers never redeem. Getting breakage wrong can overstate your liabilities for years or, worse, recognize revenue you are not entitled to keep. Here is how gift card accounting actually works under ASC 606, with the journal entries, the estimation math, and the unclaimed-property trap that catches businesses off guard.
A Gift Card Is a Promise, Not a Sale
When a customer hands you $100 for a gift card, it feels like a sale. It is not—at least not yet. You have collected cash, but you have not delivered any goods or services. What you have actually done is take on an obligation: a promise to provide $100 of merchandise or food whenever the cardholder decides to show up.
Under ASC 606, the revenue recognition standard, that obligation is a performance obligation you have not yet satisfied. So the sale of a gift card creates a liability, usually labeled "deferred revenue," "gift card liability," or "unearned revenue." No revenue hits your income statement on the day of sale.
The journal entry at the moment of sale is simple:
Dr Cash $100
Cr Gift Card Liability $100Revenue appears only when the customer redeems the card. If that same customer comes back and buys $40 of merchandise with the card:
Dr Gift Card Liability $40
Cr Revenue $40The liability shrinks to $60, and you have earned $40. This much is intuitive. The complication is what happens to gift cards that are never fully redeemed—and statistically, a meaningful chunk never will be.
What Breakage Really Is
Breakage is the dollar value of gift cards a company expects customers will never use. Industry estimates put it somewhere between 5% and 15% of total card sales, though the number swings widely by brand, card design, and customer base. Research suggests roughly 3% to 5% of gift card value goes permanently unredeemed, with additional balances drifting unused for years before either being spent or written off.
The pattern is predictable. After about a year, roughly 80% of gift card value has been redeemed. The remaining 20% breaks into two groups: cards that will eventually be used (just slowly) and cards that will never be touched at all—often estimated at around 6% of total value.
Here is the accounting problem. If a customer never redeems a card, you keep the cash forever, but you can never deliver the goods. So when does that unredeemed money become revenue? You cannot leave it as a liability indefinitely—that would permanently understate your earnings and clutter the balance sheet with obligations that will never come due. But you also cannot grab it as revenue the moment a card is sold, because you genuinely do not know which cards will be abandoned.
ASC 606 solves this with a specific framework for what it calls "customers' unexercised rights."
The Two Recognition Methods Under ASC 606
ASC 606 gives companies two ways to recognize breakage revenue, and which one you use depends on whether you can reliably predict customer behavior.
The Proportionate Method
This is the method most established retailers and restaurants use. If you have enough historical data to estimate the breakage amount with reasonable confidence, ASC 606 requires you to recognize breakage revenue in proportion to the pattern of redemptions by customers.
In plain terms: as customers redeem real cards, you simultaneously recognize a slice of the breakage you expect to never be redeemed. You do not wait for cards to expire. You earn breakage alongside redemptions, on a pro-rata basis.
The Remote Method
If you cannot reasonably estimate breakage—maybe your gift card program is brand new, or your data is too thin—you fall back to the remote method. Here, you recognize breakage revenue only when the likelihood of the customer ever redeeming the remaining balance becomes remote. That typically means waiting until a card is effectively dead: long past any expiration, long past any realistic redemption window.
The remote method is conservative and defers revenue longer. Most companies prefer the proportionate method because it matches breakage income to the periods in which the related card activity actually occurs—but you only get to use it if your estimate holds up.
Working Through a Proportionate-Method Example
Numbers make this concrete. Suppose your business sells $2,400 of gift cards in a month. Based on years of history, you estimate that 10% of card value—$240—will never be redeemed. That leaves $2,160 of expected redemptions.
Now a customer redeems $162 worth of cards. How much breakage do you recognize?
First, calculate what fraction of expected redemptions has occurred:
$162 redeemed ÷ $2,160 expected redemptions = 7.5%Then apply that same percentage to your total expected breakage:
7.5% × $240 expected breakage = $18 of breakage revenueSo that $162 redemption triggers two entries. The redemption itself:
Dr Gift Card Liability $162
Cr Revenue $162And the proportionate breakage:
Dr Gift Card Liability $18
Cr Breakage Revenue $18The liability drops by $180 total—$162 for goods delivered, $18 for breakage earned—even though the customer only walked out with $162 of merchandise.
There is a shortcut version of this math that restaurants often use. If your data shows guests leave 20% of card value unredeemed and use the other 80%, divide the forfeiture rate by the redemption rate to get a single proportionate recognition rate:
20% forfeited ÷ 80% redeemed = 25% breakage rateNow every redemption is multiplied by 25%. A guest redeems $50? You recognize $12.50 of breakage at the same time. It is the same logic, just expressed as a constant multiplier you can apply transaction by transaction.
How to Estimate Your Breakage Rate
The proportionate method lives or dies on a defensible breakage estimate. Auditors will push on this number, so it needs a foundation.
Use your own historical data first. The single best predictor of future breakage is your own redemption history. Pull several years of card sales and track, cohort by cohort, what percentage of each year's cards eventually got redeemed and how long it took. The curve flattens over time—once it goes flat, the remaining balance is your breakage.
Segment where it matters. Physical cards and digital cards often behave differently. Promotional cards (the "$10 bonus card" type) break far more often than cards customers paid full price for. Bulk corporate orders behave differently from individual purchases. If these segments are material, estimate them separately.
Revisit the estimate regularly. Breakage is an accounting estimate, and estimates get updated. If redemption patterns shift—say a mobile app makes cards easier to use—your historical breakage rate may be too high. Adjust prospectively and document why.
Be conservative when data is thin. A new program with one year of history does not support a precise estimate. Until the data matures, the remote method is the safer—and often the required—choice.
Accurate breakage accounting starts with clean records of every card sold and redeemed. When your bookkeeping captures each sale, redemption, and liability adjustment as a discrete, traceable entry, building the redemption cohorts your estimate depends on becomes a query instead of a forensic project. Sloppy records are the most common reason a breakage estimate cannot survive an audit.
The Escheatment Trap
Here is the part that surprises business owners: even if accounting rules let you recognize breakage as revenue, state law may say that money is not yours.
Every U.S. state has unclaimed property laws, also called escheatment laws. Escheat is a state's legal power to take custody of property that has no identifiable owner. Many states view an unredeemed gift card balance as exactly that—abandoned property belonging to the cardholder—and require the issuer to remit the balance to the state after a dormancy period, typically three to five years.
The rules are a patchwork:
- Many states exempt gift cards entirely. Around 37 states—including California, Texas, Florida, Illinois, Ohio, and Pennsylvania—either expressly exempt gift cards from escheatment or have no law requiring it. In those states, breakage stays with the business.
- Some states demand it. Delaware, New York, New Jersey, Georgia, and others require escheatment after a set period. Some let the business keep a percentage of the balance; Georgia and New York have required remitting the full face value.
- Your domicile matters. If you do not have the cardholder's name and address (and for most retail gift cards you do not), the unclaimed property goes to the state where your business is incorporated. Delaware—home to a huge share of U.S. corporations—requires gift card balances to escheat after five years, which is why some companies set up separate subsidiaries specifically to hold and manage gift card liabilities.
Several states have tightened enforcement recently, with stricter audits, revised reporting deadlines, and expanded self-audit programs. The practical takeaway: do not recognize breakage revenue without first checking whether your state, and your state of incorporation, actually let you keep it. Recognizing breakage income on cards you are legally obligated to hand to the state is a recipe for a restatement.
Common Mistakes to Avoid
Recognizing revenue at the point of sale. The most basic error—treating the gift card sale as revenue instead of a liability. Cash in the door is not revenue earned.
Never recognizing breakage at all. The opposite mistake. If you have the data to estimate breakage, ASC 606 requires you to recognize it proportionately. Letting the liability balloon forever overstates obligations and understates earnings.
Waiting for "expiration" to book breakage. Many gift cards, under federal law, cannot expire for at least five years—and many states ban expiration dates outright. Tying breakage recognition to an expiration date that legally may never arrive defers revenue indefinitely. Recognition follows the redemption pattern, not the card's printed terms.
Ignoring escheatment. Treating breakage as a pure accounting question and skipping the unclaimed-property analysis. The two interact, and state law can override your ability to keep the money.
Using a stale breakage rate. Locking in a rate from five years ago and never revisiting it. Customer behavior changes; your estimate should too.
Forgetting promotional cards. Bonus and promotional cards distort the blended breakage rate because they break at much higher rates. Mixing them with paid cards skews your estimate.
Keep Your Finances Organized from Day One
Gift card accounting is a reminder that revenue and cash are not the same thing—and that the difference can hide for years on your balance sheet. Whether you are tracking deferred revenue, building redemption cohorts, or documenting a breakage estimate for your auditor, it all rests on financial records that are accurate, granular, and easy to query. Beancount.io provides plain-text accounting that gives you complete transparency and version control over every transaction—no black boxes, no vendor lock-in, and a clean audit trail for exactly the kind of estimate-heavy accounting that gift cards demand. Get started for free and see why developers and finance professionals are switching to plain-text accounting.