Final answer:
Adjusting entries for a gift card involve initially recording a liability when the card is sold, then transferring this liability to revenue as the card is redeemed. If the card expires, the remaining liability is recognized as revenue.
Step-by-step explanation:
The adjusting entry for a gift card in accounting typically involves a liability account. When the gift card is sold, the company would record the sale as a liability, not as revenue because the company owes the service or product in the future. The journal entry at the time of the sale would be a debit to Cash and a credit to Unearned Revenue (or a similarly named liability account like Gift Card Liability).
When the gift card is redeemed, an adjusting entry is made to reduce the liability and recognize the revenue. The journal entry would be a debit to Unearned Revenue and a credit to Revenue, reflecting that the company has now fulfilled its obligation and can recognize the income. If the gift card expires and is not likely to be redeemed, the company makes another adjusting entry, moving the balance from Unearned Revenue to Revenue, recognizing the income from the expired gift card.