Oops! Something went wrong while submitting the form.
Get a Demo
See your data in HubiFi < 2 days
Get clear, actionable steps for breakage accounting, from estimating breakage rates to staying compliant with revenue recognition and state regulations.
If you’ve ever found an old gift card in a drawer with a few dollars left on it, you’ve seen breakage firsthand. For businesses that sell gift cards, subscriptions, or loyalty points, this unredeemed value can seem like free money. But it comes with a catch. You can't just pocket the cash and call it a day; specific rules dictate how and when you can recognize it as revenue. This is where breakage accounting comes in. Getting it right is essential for accurate financial reporting and staying compliant with standards like ASC 606. It’s all about turning that leftover value into recognized revenue the correct way.
If you’ve ever found an old gift card in a drawer with a few dollars left on it, you’ve encountered breakage. It’s a common part of business, especially for companies that sell gift cards, subscriptions, or loyalty programs. While it might seem like free money, accounting for it correctly is essential for accurate financial reporting and staying compliant. Getting a handle on breakage accounting helps you reflect your company’s financial health accurately and make smarter decisions. It’s all about recognizing revenue at the right time for services you’ve been paid for, even if the customer never claims them.
So, what exactly is breakage? In simple terms, breakage is the portion of prepaid revenue from sources like gift cards or service credits that a customer never redeems. When a customer pays you in advance, you record that money as a liability because you still owe them a product or service. If they never redeem the full value, the leftover amount becomes breakage. Instead of sitting as a liability on your books forever, accounting rules allow you to recognize this unused value as revenue after a certain period, once the chance of redemption becomes very low.
Breakage isn't limited to just one or two industries; it shows up in many different business models. The most classic example is retail gift cards, where a customer might spend most of the balance but leave a small, forgotten amount behind. But the concept extends far beyond that.
Here are a few common places you’ll find breakage:
Any time a customer pays upfront for something they might not fully use, you have the potential for breakage. Recognizing these scenarios in your own business is the first step to managing them correctly.
You can’t just count breakage as revenue the moment you suspect a gift card won’t be used. Specific accounting standards, particularly ASC 606, provide a framework for how and when to do this. The core principle is that you must recognize breakage revenue in proportion to the pattern of customer redemptions. This means you need to estimate how much breakage you expect and then recognize it gradually as other customers redeem their gift cards or credits. This approach ensures your revenue is reported accurately over the life of the customer obligation, rather than in one lump sum, which could distort your financial statements.
When it comes to breakage, you can’t just guess or wait until the last minute to account for it. The Financial Accounting Standards Board (FASB) set clear guidelines in its ASC 606 standard, which outlines a five-step model for revenue recognition. These rules change how you think about unredeemed balances from gift cards or prepaid services, shifting the focus from a simple expiration date to a more dynamic, proportional model. Getting this right isn't just about clean books; it's about maintaining compliance and having a true picture of your company's financial health.
Under ASC 606, you have to proactively estimate the amount of prepaid value you believe will never be redeemed—that’s your breakage. You can't just recognize this revenue in a lump sum when a gift card expires. Instead, the standard requires you to recognize the estimated breakage revenue in proportion to the pattern of actual customer redemptions. This means as customers use their gift cards, you recognize a portion of the sale and a proportional slice of the expected breakage. This approach ensures your revenue is a more accurate reflection of performance over time, keeping you aligned with current accounting standards.
It’s easy to think of a gift card sale as immediate revenue, but it’s not. When a customer buys a gift card, you should record that money as a liability, often called "deferred revenue." You owe that customer goods or services, so the cash isn't truly yours to claim yet. You only recognize revenue as the customer redeems the card. If you expect breakage, you’ll recognize that expected amount as revenue in line with how customers are redeeming their cards. This proportional method means your revenue recognition is tied directly to customer behavior, giving you a more accurate, real-time view of your earnings.
Accurate breakage estimation is impossible without solid data. To stay compliant and pass audits, you need to keep detailed records for every single gift card or prepaid service. This includes the sale date, original value, and a full history of any redemptions. Regularly reconciling these records against your sales data helps you catch discrepancies early and refine your breakage estimates. Manually tracking this across spreadsheets is a recipe for errors, which is why having integrated systems that automatically sync your sales and accounting data is so important for maintaining an accurate, audit-proof trail.
Estimating your breakage rate is a critical step in getting your revenue recognition right. It’s not about pulling a number out of thin air; it’s about making an informed projection based on solid data and consistent analysis. Getting this estimate wrong can lead to inaccurate financial statements and compliance headaches down the road. The goal is to find a reliable method that reflects how your customers actually behave, ensuring your books are always accurate and audit-ready.
Think of it as a three-part process: you start by looking back at your history, apply some smart analysis to refine your number, and then commit to regularly checking in to make sure your estimate stays accurate. This approach helps you stay compliant with standards like ASC 606 and gives you a clearer picture of your company’s financial health. It’s a proactive way to manage your finances instead of just reacting to them. Let’s walk through how you can build a dependable estimation process for your business, turning a potentially complex task into a manageable part of your financial operations.
The best place to start is with your own numbers. Your company’s history is a goldmine of information about customer behavior. Look at your past gift card sales and redemption patterns over a significant period—five to ten years of data is a great target. This will help you see what percentage of your prepaid value typically goes unused. If your business is new and you don’t have a long track record, a good starting point is to estimate a breakage rate between 5% and 10%. This initial benchmark gives you a reasonable figure to work with as you begin to collect your own data and establish your unique patterns.
For businesses with more complex loyalty programs or long-running gift card initiatives, a simple historical average might not be enough. This is where statistical models come in. These models can account for more variables, like the age of a liability, redemption velocity, and different customer segments. Estimating breakage can be tricky, especially for long-running programs, and it requires excellent data tracking. Using a more sophisticated model helps you move from a good guess to a data-driven forecast. This is often where having the right data consultation can make a huge difference, turning raw numbers into a precise and defensible estimate.
Your breakage rate isn't a "set it and forget it" number. Customer behavior changes, market conditions shift, and your own promotions can influence redemption patterns. Because of this, you need to review and update your breakage estimate at the end of each reporting period, whether that’s quarterly or annually. This ongoing monitoring ensures your financial reports remain accurate and compliant over time. Regularly reviewing your assumptions against actual results helps you refine your model and build confidence in your numbers, which is exactly what you need for a smooth audit and strategic financial planning.
Handling breakage correctly goes beyond accounting principles; it’s also a matter of legal compliance. The rules surrounding unclaimed property, which includes unredeemed gift cards and prepaid services, are not set at the federal level. Instead, they are dictated by a patchwork of state laws that can vary dramatically from one jurisdiction to another. This means a company operating nationwide has to be aware of and comply with dozens of different regulations.
These laws directly impact how you account for breakage. While ASC 606 provides the framework for when you can recognize revenue, state laws determine if you can recognize it at all. Some states require businesses to turn over the value of unused balances to the state after a certain period of inactivity. This process, known as escheatment, means that money can’t be claimed as breakage revenue. Failing to comply can lead to significant penalties and audits, making it essential to get this right. Understanding your legal obligations is the first step in building a compliant and accurate revenue recognition process.
Because there’s no single federal law for breakage, you need to pay close attention to the rules in every state where you do business. The regulations for unused gift card money can be completely different depending on the location of the sale. For example, some states have strict rules about expiration dates and dormancy fees, while others are more lenient. This is why it's critical to track the state where each gift card was sold or where the customer resides. This information determines which set of laws applies to that specific liability on your books.
Escheatment is a legal process that requires companies to hand over unclaimed financial assets to the state. Think of it as a "lost and found" for money. If a customer doesn't use their gift card for a specified amount of time (known as a dormancy period), the state considers that money abandoned property. You are then legally required to remit those funds to the state, which will hold them for the rightful owner. It's crucial to remember that any money subject to escheatment should not be included in your breakage calculations. It never becomes your revenue.
State escheatment laws come with strict reporting requirements. You must identify and track all unclaimed property, including unused gift card balances, and remit it to the appropriate state government on time. This means any funds that must be sent to the state cannot be counted as breakage income for your business. To stay compliant, you need a robust system for tracking sales by state and monitoring dormancy periods for each outstanding liability. This is where having seamless integrations with HubiFi can make a huge difference, ensuring your financial systems can accurately separate recognizable breakage from funds destined for escheatment.
Manually tracking gift card sales, redemptions, and breakage in spreadsheets is a recipe for headaches and costly errors. As your business grows, you need a system that can keep up. The right tools not only save you time but also ensure your financial reporting is accurate and compliant. By leaning on technology, you can turn a complex accounting task into a streamlined, automated process that supports your business goals. Let's walk through the key components of a modern tech stack for managing breakage.
When it comes to managing breakage, specialized software is your best friend. These platforms are designed to handle the entire lifecycle of a gift card, from initial sale to final redemption or breakage recognition. Think of it as your central hub for all things deferred revenue. The right software can automatically track unredeemed balances, apply your estimated breakage rate, and generate the correct journal entries, all while keeping you aligned with accounting standards like ASC 606. This eliminates the guesswork and manual calculations that often lead to mistakes, giving you a clear and accurate picture of your liabilities and revenue.
Making an accurate breakage estimate depends entirely on the quality of your data. This is where data analytics comes in. By analyzing your historical gift card sales and redemption patterns, you can identify trends that lead to much more reliable forecasts. How long does it typically take for customers to redeem their cards? Are there seasonal peaks? Do certain card values get forgotten more often? Answering these questions helps you refine your breakage rate over time. Good financial software provides the insights you need to monitor these trends and adjust your estimates regularly, ensuring your financial statements remain accurate.
Automation takes breakage accounting from a tedious, manual chore to a seamless background process. An automated revenue recognition system ensures that breakage is tracked accurately and in real-time, keeping you compliant with ASC 606 without constant oversight. It handles the complex calculations for you, reducing the risk of human error and providing detailed records that make audits much smoother. This means you can close your books faster and with greater confidence each month. If you’re ready to see how automation can transform your financial operations, you can schedule a demo to see it in action.
Your gift card platform shouldn't be an island. When it doesn’t communicate with your accounting software, ERP, or CRM, you end up with data silos and a lot of manual reconciliation work. Integrating your systems ensures that all your financial data is consistent and up-to-date across the board. This creates a single source of truth, so the data in your sales platform matches the data in your general ledger. Seamless integrations are key to maintaining data integrity, improving efficiency, and getting a holistic view of your company’s financial health.
Once you have a handle on estimating and managing breakage, the final piece of the puzzle is reporting it correctly. This isn’t just about checking a box for compliance; it’s about creating financial statements that accurately reflect your business's health. When your reporting is solid, you can make better strategic decisions, from budgeting to forecasting. Clear, confident reporting also builds trust with investors, stakeholders, and auditors. It shows that you have strong financial controls and a true understanding of your revenue streams.
Getting your breakage accounting right means your balance sheet and income statement tell a consistent and accurate story. It requires a bit of diligence, but breaking it down into manageable steps makes the process much clearer. Let's walk through how breakage impacts your key financial reports and what you can do to ensure your numbers are always audit-ready. With the right systems in place, you can move from worrying about compliance to using your financial data as a powerful tool for growth.
Think of your balance sheet as a snapshot of what your company owns and owes at a specific moment. When a customer buys a gift card, your business gets cash but also creates a debt (called 'deferred revenue') because you owe them goods or services. This deferred revenue is a liability on your balance sheet, and it stays there until the customer uses the card. As cards are used or breakage is counted, this debt goes down. Properly recognizing breakage reduces this liability, ensuring your balance sheet gives a true and fair view of your company’s financial position and you aren't overstating what you owe.
While the balance sheet shows what you owe, the income statement shows what you’ve earned. This is where recognized breakage makes its appearance as revenue. Breakage income adds to your total sales revenue. It's usually counted gradually, not all at once, based on your historical data and redemption patterns. This methodical approach is key to complying with ASC 606 and provides a much more stable and realistic picture of your company's performance. It prevents artificial spikes in your earnings and reflects a steady, predictable revenue stream from unredeemed balances, which is exactly what you want to see.
Strong internal controls are the foundation of confident financial reporting. Without them, you’re just guessing. The first rule is to keep good records: track every gift card sale and every time a card is used. For high-volume businesses, manual tracking isn't just inefficient—it's a recipe for errors. You need a reliable system that centralizes this data. Establishing seamless integrations between your point-of-sale, e-commerce, and accounting software ensures that all your data lives in one place, giving you a single source of truth for every transaction from start to finish.
No one looks forward to an audit, but you can make the process significantly less painful with good preparation. Auditors want to see a clear, logical, and well-documented process for how you calculate and recognize breakage. Detailed records and automated calculations help businesses pass audits and close financials quickly. When you use an automated system, you create a clean audit trail that justifies your numbers. This not only satisfies auditors but also gives you confidence in your own financials. If you're ready to see how automation can streamline your process, you can schedule a demo to explore the possibilities.
Managing breakage comes with a few common hurdles, but they're all solvable with the right approach. From getting the numbers right to keeping your records straight, here’s how to tackle the most frequent challenges so you can handle your revenue with confidence and stay compliant.
One of the biggest mistakes is booking gift card sales as immediate revenue. When a customer buys a gift card, that cash is a liability on your books called "deferred revenue" because you still owe them goods or services. According to ASC 606 guidance, you can only recognize breakage as revenue over time, in line with how customers actually redeem their cards. Getting this timing wrong can throw off your financial statements and lead to compliance headaches. Think of it as a promise to your customers; you can only count the income from broken promises once it's clear they won't be claimed.
Estimating how much breakage you'll have can feel like guesswork, but it doesn't have to be. The best approach is to look at your own history. Analyzing five to ten years of gift card data will give you a solid foundation for a reliable breakage rate. If your business is new, a conservative estimate of 5% to 10% is a reasonable starting point. The key is to not "set it and forget it." You should review your breakage estimates regularly—at least quarterly—to adjust them as you gather more data and your redemption patterns become clearer.
Clean records are your best friend in breakage accounting. You need a clear trail of every gift card sold and every dollar redeemed. Trying to do this manually is a recipe for errors and wasted hours. This is where automation makes a huge difference. An automated system can track sales and redemptions in real-time, which drastically reduces mistakes and gives you accurate data when you need it. Having this information organized and accessible not only simplifies your day-to-day accounting but also makes audits much less stressful. Seamless system integrations are crucial for making this happen.
Before you recognize any breakage as revenue, you need to understand the law. Many states have escheatment laws, which are rules about unclaimed property. In some cases, these laws require you to turn over unredeemed gift card balances to the state after a certain period. This money cannot be counted as breakage revenue. Failing to comply can lead to penalties and legal trouble. It's essential to research your state's specific unclaimed property regulations to ensure you're handling these funds correctly and protecting your business from unnecessary risk.
As your business grows, breakage accounting gets more complicated. When you’re juggling different revenue types, expanding into new regions, or working within industry-specific rules, a one-size-fits-all approach won’t cut it. Getting these complex scenarios right is essential for accurate financial reporting and compliance. Let’s walk through how to handle common challenges, from managing multiple revenue streams to addressing industry-specific hurdles.
Most businesses have more than one source of prepaid revenue, like gift cards, loyalty points, and annual subscriptions. When a customer pays upfront, you have an obligation to provide goods or services later. This means you need to set aside a portion of the money as a liability. Each revenue stream has unique redemption patterns, so you’ll need to calculate and track breakage for each one separately. A unified system that can handle multiple data integrations is key to keeping everything organized and accurate.
Remember that rules for unredeemed funds can vary significantly depending on where you do business. Many states have specific laws about unused gift card balances. Some jurisdictions even have “escheat laws,” which require companies to hand over unexercised funds to the government after a certain period. If these laws apply, you cannot recognize that money as your own revenue—it legally belongs to the state. Before booking any breakage income, research the local regulations for every region you operate in to avoid costly compliance issues.
How you account for breakage often depends on your industry. For a restaurant, a standard gift card sale creates “deferred revenue,” which isn't income until a customer uses the card. Promotional cards are different. If you run a “buy a $100 gift card, get a $20 bonus card” offer, that bonus is a “deferred expense” you recognize as it’s used. A SaaS company might deal with unused subscription credits, while a retailer tracks loyalty points. Understanding these nuances is crucial, and the right tools can help manage these complexities. You can schedule a demo to see how HubiFi handles these scenarios.
Turning breakage from a complicated accounting task into a predictable part of your revenue stream starts with a solid plan. A proactive strategy doesn't just keep you compliant; it gives you a clearer picture of your company's financial health. By setting up a system to collect, analyze, and act on your data, you can manage breakage with confidence and precision. Building this strategy involves four key steps: gathering the right information, creating a framework for analysis, using the right tools, and staying on top of compliance. Let's walk through how to put each piece in place.
Everything starts with good data. To accurately estimate breakage, you need to track every gift card sale and redemption. Think of this as the foundation of your entire strategy—without it, any estimate is just a guess. Ideally, you should look at five to ten years of historical data to identify clear patterns in how often gift cards are used. If your business is new and you don't have that history, a common starting point is to estimate breakage at 5% to 10%. The goal is to build a reliable dataset that reflects your customers' actual behavior over time.
Once you have the data, you need a framework to make sense of it. This means using your historical information to estimate the percentage of gift cards that will likely go unused. This isn't a one-time calculation. You should plan to regularly review and update your estimates to ensure your financial reports remain accurate. As your business evolves and customer habits change, your breakage rate will, too. Creating a consistent process for analysis helps you adapt and maintain the integrity of your revenue recognition process.
Manual tracking is prone to errors and can quickly become overwhelming. The right technology makes all the difference. Automated systems can track gift card sales and redemptions in real-time, which saves time and reduces costly mistakes. The key is to connect your gift card platform with your other financial software, like your accounting programs and ERP. Seamless integrations ensure all your data is consistent and up-to-date across every system, giving you a single source of truth for your financial reporting.
Finally, managing breakage isn't just an internal accounting issue—it has legal implications. Many states have escheatment laws that require businesses to remit the value of unredeemed gift cards to the state after a certain period. These amounts cannot be recognized as breakage revenue. It's crucial to stay informed about the specific gift card regulations and escheatment rules in the states where you operate. Regularly monitoring these laws helps you avoid penalties and ensures your breakage accounting practices remain fully compliant.
Is it okay to just recognize breakage revenue when a gift card expires? That used to be a common practice, but current accounting standards require a more proactive approach. Under ASC 606, you can't simply wait for an expiration date. Instead, you should estimate your expected breakage and recognize that revenue proportionally as other customers redeem their cards. This method ties your revenue directly to customer behavior and provides a more accurate, ongoing picture of your financial performance.
What's the biggest mistake companies make with breakage accounting? The most frequent error is booking the cash from a gift card sale as immediate revenue. When a customer pays you in advance, that money is a liability on your books, often called "deferred revenue," because you still owe them a product or service. Recognizing it all upfront overstates your income and can lead to major compliance issues and distorted financial statements down the line.
What if my business is new and I don't have years of historical data to estimate breakage? That's a common situation for growing businesses. Without a long track record, a good starting point is to use a conservative industry benchmark, typically between 5% and 10%. The most important thing is to begin meticulously tracking your sales and redemption data from day one. As you collect more information, you can regularly review and adjust your estimate to better reflect your own customers' behavior.
How does breakage actually affect my company's bottom line? Breakage impacts your two main financial statements in different ways. Initially, an unredeemed gift card sits on your balance sheet as a liability, since you owe a customer goods or services. When you correctly recognize breakage, you reduce that liability and simultaneously report it as revenue on your income statement. This process gives a truer picture of your company's financial health by accurately reflecting both your obligations and your earnings.
Why can't I just count all unredeemed gift card money as breakage? While it might seem like free money, state laws often have the final say. Many states have escheatment laws that treat abandoned property, including unredeemed gift card balances, as funds that must be turned over to the state after a certain period of inactivity. This money never legally becomes your revenue. It's essential to separate the funds subject to escheatment from the amount you can legitimately recognize as breakage income.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
Copyright © 2025 HubiFi | All rights reserved.
