Final answer:
The revenue recognition principle states that revenue should be recognized when it is earned and realizable. When accounting for gift card revenue, a deferred revenue account can be used to follow this principle.
Step-by-step explanation:
The revenue recognition principle is a principle in accounting that states that revenue should be recognized when it is earned and realizable, regardless of when the payment is received. In other words, revenue should be recorded when goods or services are provided to customers, and the seller can reasonably expect to be paid for those goods or services. This principle is important because it ensures that revenue is recorded accurately and in the appropriate period.
When accounting for gift card revenue, the revenue recognition principle can be followed by using a deferred revenue account. When a gift card is sold, the revenue is not yet earned because goods or services have not been provided to the customer. Instead, the revenue is recorded as a liability in the deferred revenue account. As the customer uses the gift card and purchases goods or services, the revenue is then recognized and moved from the deferred revenue account to the revenue account. This ensures that revenue is recorded in the appropriate period, matching the revenue with the related expenses.