Breakage

Breakage is basically a topic that belongs to the category of Finance however sometimes firms get involved in breakage that have an effect on their revenues so we are going to discuss this topic under the accounting umbrella. Breakage is a form of revenue that is basically allocated for the customers but is redeemed by the retailers. The revenue that is generated in the form of breakage comes from gift cards that are issued for the customers as favors by different companies and businesses. Breakage is generated by unredeemed gift cards, lost gift cards and expired gift cards. A study done by careful surveys and analysis shows that customer lost almost about 8 billion of cash to the retailers due to breakage. This loss creates an account uncertainty in the financial accounts of retailers that may upsets the calculations regarding the generation of final financial statements of the business. In order to avoid such confusions most of the retailers do not put any expiry limit or other forms of terms and conditions on their gift cards.

Revenue generated from breakage is considered to be profitable for the business as the business don’t have to provide any kind of compensations for the unredeemed cards or offers. Most of the companies don’t add revenue generated from breakage in their profit account as they may get criticism from others for using breakage to improve their revenue numbers. Another name of breakage is “accounting for gift cards”. Retailers can estimate the future value of breakage by following the trends of un-redemption of gift cards in their business in order to avoid accounting confusion in future.

Other Related Accounting Articles:

• Qualified Disclaimer
• Forecasting
• Relationship Banking
• Operating Loss
• Vulture Fund
• Deferred Billing
• Information Analysis
• Managing Cash Flows in a Better way
• Petty Cash Accounting
• Accounting for bad debts and early payment discounts