Quick answer: Record gift cards sold as a liability and recognize revenue only when they’re redeemed. Record holiday refunds in their own returns account, put resellable returned stock back into inventory and write off the rest. Before December closes, plan January cash for refunds, redemptions and sales tax due, because they all arrive as sales slow down.
Key takeaways
- NRF estimated 17% of 2025 holiday sales would be returned, and 19.3% of online sales.
- Gift cards aren’t revenue until redeemed; booking them as sales overstates December.
- Track exchanges and store credit separately from refunds.
- Split marketplace settlements that cross into January.
- Build a January cash plan before the year ends.
December is the month most e-commerce brands wait for. January is the month that settles the bill. Returns come back, refunds go out, gift cards get redeemed and sales slow down, often all in the same few weeks.
None of that is a surprise if your books are set up for it. This guide covers how to book holiday returns, refunds and gift cards so December’s numbers are real and January’s cash is something you planned for.
How big is the January returns wave?
Bigger than many sellers plan for. The National Retail Federation and Happy Returns estimate that retailers expected 15.8% of annual sales to be returned in 2025, rising to 17% of holiday sales and 19.3% of online sales. The same report found 9% of all returns were fraudulent.
For an online brand with a strong December, that means a meaningful share of holiday revenue is likely to come back as refunds in the weeks that follow.
Why do returns distort your December numbers?
A sale in December and its refund in January land in different months. If you do nothing, December shows the full sale and January takes the full hit. December looks better than it was. January looks worse. Neither month tells you how the season actually went.
There are two ways to deal with it:
- Track returns against the month of sale. Report your holiday return rate by matching January refunds back to December orders. This tells you what the season really earned.
- Estimate expected returns at month-end. Businesses that report under accrual accounting often record an estimate of expected returns when they make the sale, based on their historical return rate. Ask your CPA whether this fits your reporting.
Either way, keep refunds in their own account, not netted silently against sales, so you can see the rate by month and by channel.
How should refunds be recorded?
- Record the refund to a refunds or returns account, a reduction of sales on its own line.
- Reverse the related sales tax if the platform refunded it to the customer.
- Put returned stock back into inventory if it’s resellable, at its original cost. If it’s damaged, write it off to a separate account so you can see the cost of unsellable returns.
- Record return shipping you paid as its own expense.
- Watch processing fees. Some processors keep part or all of the original fee on a refund, which is a cost of the return.
How do gift cards work in the books?
A gift card isn’t revenue when you sell it. It’s a promise to deliver goods later, so it’s recorded as a liability, and revenue is recognized when the card is redeemed. Large retailers report it the same way: The Cheesecake Factory’s annual report, quoted in RevenueHub’s guide to ASC 606, states “We recognize a liability upon the sale of our gift cards.”
Here’s how that plays out with illustrative figures.
| Month | What happens | In the books |
|---|---|---|
| December | You sell $15,000 of gift cards | Cash up $15,000, gift card liability up $15,000, no revenue |
| January | Customers redeem $9,000 | Gift card liability down $9,000, revenue up $9,000 |
| February to June | Customers redeem $4,500 more | Liability down, revenue up as each card is used |
| Later | $1,500 is never redeemed | Handled under breakage and state unclaimed property rules |
If you’d booked the $15,000 as December revenue, December would be overstated by $15,000. January would look $9,000 weaker than it really was, because the goods went out with no new revenue.
What is gift card breakage?
Breakage is the part of a gift card balance that customers never use. Under current revenue rules, a business that expects breakage generally recognizes it gradually, in proportion to how customers redeem their cards, rather than all at once. Some states also have unclaimed property, or escheat, laws that require unused balances to be paid to the state instead.
The rules vary by state and by how your cards are issued, so this is a question for your CPA. The bookkeeping takeaway is simpler: keep an accurate gift card liability balance and a record of redemptions, so the right answer is easy to apply.
How do you plan January cash?
Returns, refunds and a slower sales month all arrive at once. Before December closes, estimate:
- Refunds to come: your historical holiday return rate applied to December sales.
- Gift card redemptions: the goods you’ll ship against cards already paid for.
- Sales tax due: December’s collections are often payable in January.
- Inventory bills: restocking orders placed for Q1.
- Weeks of cash on hand: your cash balance divided by your average weekly outflow.
If the numbers look tight, you have time to adjust reorders or ad spend before January rather than after.
We built a one-page January Cash Planner for Sellers that walks through this in about 15 minutes.
What does a January cash plan look like?
Here’s an illustrative plan for a brand going into January with $120,000 in the bank after a strong December.
| January | Amount |
|---|---|
| Cash on January 1 | $120,000 |
| Sales received, net of fees | $70,000 |
| Refunds on holiday orders | −$28,000 |
| December sales tax due | −$14,000 |
| Inventory restock for Q1 | −$45,000 |
| Payroll and overhead | −$40,000 |
| Advertising | −$10,000 |
| Cash on January 31 | $53,000 |
Total outflows are $137,000 for the month, about $34,250 a week. Ending cash of $53,000 covers roughly 1.5 weeks of spending. That isn’t a crisis, but it’s tight for a month when sales are slowing.
The plan shows where you have room to act. Delaying part of the restock until February, or trimming January ad spend while conversion rates are lower, could add weeks of runway. You can only make those choices if you see the numbers in December.
How do exchanges and store credit work?
Not every return is a refund. Exchanges and store credit keep the sale in your business, but they still need to be recorded correctly.
Exchanges. If a customer swaps one item for another of the same price, record the returned item back into inventory and the new item out. Revenue doesn’t change. If the prices differ, record the difference as an additional sale or a partial refund.
Store credit. Credit issued instead of a refund works like a gift card. It’s a liability until the customer uses it. Record it to a store credit account, separate from gift cards if you can, and recognize revenue when it’s redeemed.
Tracking these separately matters for your return rate. A business that converts many returns into exchanges or credit keeps more of its holiday revenue than one that refunds everything, and your reports should show that difference.
How should marketplace returns be booked?
Returns on Amazon and other marketplaces arrive inside the settlement, not as a separate refund from you.
- The refund appears as a negative line in the settlement. Record it to refunds, by channel.
- Fees may be partly returned to you or partly kept. Record what the settlement shows, not the original fee.
- Returned units go back into your FBA inventory if they’re sellable, or into an unsellable category. Unsellable units should be written off or removed.
- Reimbursements may follow if a returned unit was lost or damaged by the marketplace. Record those to their own account.
Because marketplace refunds can land weeks after the original sale, January settlements often carry a heavy load of December refunds. Splitting settlements by date keeps each month accurate.
How do you protect against return fraud?
The NRF figure that 9% of returns in 2025 were fraudulent is a reminder that a generous holiday policy can be exploited. Your bookkeeping can’t stop fraud on its own, but it can show you where to look.
- Match every refund to an original order. Refunds without a matching sale deserve a second look.
- Track return rates by product and customer. A small number of customers or SKUs often drive a large share of returns.
- Inspect returned goods before restocking, and record anything not resellable as a write-off.
- Set clear holiday return windows, and make sure your team applies them consistently.
How do you keep the gift card liability accurate?
Your gift card liability should equal the total unredeemed balance on every card you’ve issued. Once a month:
- Pull the outstanding gift card balance from your platform or POS.
- Compare it to the gift card liability account in your books.
- Investigate any difference. Common causes are gift cards booked as sales, redemptions not recorded or promotional cards issued for free.
- Record promotional cards correctly. A free card given in a promotion is a discount when it’s redeemed, not a sale when it’s issued.
A liability that matches your platform’s balance is the foundation for any breakage decision your CPA makes later.
Your holiday close checklist
- Record all December sales, with gift cards in the liability account
- Record refunds, exchanges and store credit on their own lines
- Restock sellable returns and write off the rest
- Split marketplace settlements that cross into January
- Reconcile the gift card liability to your platform’s balance
- Reconcile sales tax payable and note the filing dates
- Build a January cash plan and review it weekly
- Report your holiday return rate by channel and product
A holiday returns timeline: what to book when
Holiday returns follow a predictable calendar. Knowing what lands when makes each month easier to close.
| When | What happens | What to book |
|---|---|---|
| November | Black Friday and Cyber Monday orders, early gift card sales | Sales at gross, gift cards to the liability account |
| Early December | Peak orders and gift card sales | Sales, liability, and an estimate of expected returns if you use one |
| Late December | Last shipping days, gift cards bought as last-minute gifts | Sales, liability, and month-end receivables from platforms |
| January | Returns, refunds and gift card redemptions peak | Refunds to the returns account, restocked or written-off units, revenue from redemptions |
| February | Late returns within extended holiday windows, marketplace reimbursements | Remaining refunds and reimbursements, final holiday return rate |
Two habits make this calendar work. First, set your holiday return window before the season starts and write it into your plan. If returns are accepted until January 31, you know when the season’s numbers will be complete. Second, report the holiday return rate in February, once the window has closed, by matching every refund back to the month of the original sale.
That February report is one of the most useful you’ll produce all year. It tells you how much of your holiday revenue you really kept, which products came back most and which channel had the highest return rate. All three should shape your plans for the next holiday season.
How does this look in practice?
Take an illustrative apparel brand that sells mostly online and had its biggest December yet. Its books recorded gift cards as sales and netted refunds silently against revenue.
January looked like a crisis. Revenue fell sharply, refunds poured in and cash dropped faster than the owner expected. The P&L suggested the business had suddenly stopped working.
When the books were corrected, the story was different. About $20,000 of December revenue was really gift cards sold, a liability that customers were now redeeming. Refunds, once matched back to December orders, showed a holiday return rate in line with the industry. And the January cash dip had been entirely predictable: refunds, gift card redemptions and December’s sales tax were all due in the same few weeks.
The next year, the brand set up a gift card liability account, tracked refunds on their own line and built a January cash plan in early December. January was still the slowest month of the year, but it was no longer a surprise.
When is it time to get help?
Holiday bookkeeping is where small errors compound. It may be time to bring in help if:
- Gift card sales have been booked as revenue, and the liability balance doesn’t match your platform.
- Refunds are netted against sales, so you don’t know your real holiday return rate.
- Marketplace settlements cross into January and haven’t been split.
- You don’t have a January cash plan and December was your biggest month.
The fix is the same whoever does it: gift cards as a liability, refunds on their own line, settlements split by month and a cash plan built before the year ends.
Key terms
- Refund: money returned to a customer for a returned or cancelled order.
- Return rate: returns as a percentage of sales for the same period or season.
- Gift card liability: the value of gift cards sold but not yet redeemed.
- Redemption: a customer using a gift card or store credit to buy goods.
- Breakage: the part of gift card balances customers never use.
- Unclaimed property (escheat): state rules that may require unused balances to be paid to the state.
- Store credit: credit issued instead of a refund, held as a liability until used.
- Write-off: removing the cost of unsellable stock from inventory.
What are the most common holiday bookkeeping mistakes?
- Gift cards booked as revenue. December is overstated and the liability disappears.
- Refunds netted against sales. You lose sight of your return rate.
- Returned stock never restocked. Inventory and COGS drift apart.
- No January cash plan. The slow month arrives with the biggest bills.
For how this fits into keeping a Shopify store’s books clean, see Bookkeeping for Shopify Businesses.
FAQs
Are gift cards revenue when sold?
No. They’re a liability until the customer redeems them. Revenue is recognized at redemption.
What percentage of holiday sales are returned?
NRF and Happy Returns estimated 17% of holiday sales would be returned in 2025, and 19.3% of online sales across the year.
Should refunds reduce sales or be an expense?
Record them in a refunds or returns account that reduces sales, on its own line, so you can track your return rate.
What happens to gift card balances that are never used?
That’s breakage. How and when it’s recognized depends on revenue rules and your state’s unclaimed property laws, so confirm the treatment with your CPA.
Is store credit the same as a gift card in the books?
It works the same way: a liability until it’s used. Keeping it in a separate account makes your reporting clearer.
How do I record an exchange?
Return the original item to inventory and record the new item going out. Revenue only changes if the prices differ.
How should I plan cash for January?
Estimate refunds, gift card redemptions, sales tax due, inventory bills and fixed costs, then compare them to cash on hand and expected sales.
How do I spot return fraud in my numbers?
Match refunds to original orders and track return rates by product and customer. Unusual patterns are where to look first.
Start 2027 with clean books. CoCountant’s controller-led team books returns, refunds and gift cards correctly every month, so your December numbers are real and January is planned. Until December 31, the Year-End Offer includes 2 months of controller-led bookkeeping on us (12 for the price of 10) and 50% off our e-commerce add-on.
