How to Record Prepaid Packages, Memberships and Gift Cards

Record a prepaid package or gift card as a liability when you sell it, then move it to income as sessions are used or the card is redeemed. Monthly memberships are recorded as income as they bill. The balance you still owe should match your booking or practice software every month.

The short answer

When a client pays before you do the work, the money is real but it isn't earned yet. Until the session happens, you owe the client either the session or, under your refund policy, the money back. So the payment sits on the balance sheet as a liability, often called unearned or deferred revenue, and moves to income as the work is done.

• Session packages and care plans: a liability when sold, income as each session or visit is used
• Gift cards: a liability when sold, income when redeemed
• Monthly memberships: income as each month bills
• Refunds of unused sessions: a reduction of the liability, not of income
• Expired or unused balances: handled the way your CPA directs, within your state's rules

Who this applies to

The rule is the same wherever a client prepays for a service. A massage studio sells a five-session package. A chiropractor sells a prepaid care plan. A personal trainer sells a 10-session pack. A vet clinic runs a wellness plan that bills monthly. Gift cards work the same way in all of them. So does an IT firm that sells a prepaid block of support hours or an annual agreement paid up front (more on that in bookkeeping for IT services and MSPs).

Wellness plans and some care plans can run the other way. A client might use the exam, vaccines and lab work early in the year while still paying monthly. If they cancel partway through, the plan's terms decide whether they owe the rest or are due a refund, and the books record whichever happens. Either way, plan payments belong in their own revenue line, apart from regular visit income.

Why it goes wrong

Your booking app pays out the cash soon after the package or gift card sells, and it's natural to treat that deposit as income. Do that and December looks great, because holiday gift cards come in, and February looks weak, because clients are redeeming those cards and you're doing the work with no new cash attached.

You also lose track of what you owe. Say a dozen clients each have three sessions left on packages priced at $100 a session. That's $3,600 of work, or refunds, you've already been paid for. If none of it shows on the balance sheet, your books say you have more room than you do.

How to record it, step by step

1. Set up the accounts. Add a liability account for prepaid packages or plans and a separate one for gift cards. On the income side, keep session, package and membership revenue on their own lines if you want to see them apart.
2. Record each sale to the liability. When a $500 package sells, the full $500 goes to the prepaid package liability, even if $485 reached the bank after fees. The $15 processing fee is an expense in the month it's charged.
3. Work out the value per session. Divide the package price by the number of sessions. A five-session package sold for $500 is worth $100 a session.
4. Move income as sessions are used. Each month, use your software's package usage and gift card redemption reports to move the value of what was used from the liability to income.
5. Record memberships as they bill. Each successful charge is recorded for that month, and failed payments are tracked separately until they're collected.
6. Record refunds against the liability. A refund of unused sessions reduces what you owe, not your income.
7. Tie out every month. The liability balances in your books should match the outstanding package and gift card balances in your software at month end.

A worked example

Say a massage studio has this March. The numbers are hypothetical and kept round.

The studio took in $680 in March but earned $380. The other $300 is three sessions it still owes on the package. If all $680 had gone straight to income, March would look $300 better than it was, and the three sessions delivered later would bring in no income at all.

Memberships, refunds and expirations

Memberships. A monthly membership is recorded as income as each month bills. If your membership lets unused sessions roll over, those banked sessions are owed too. Ask your CPA whether to track them like a package; we can keep a running balance either way.

Refunds. Say the client in the example cancels after two sessions and gets the remaining $300 back. The liability drops to zero, the $200 already earned stays as income, and the $300 goes back out of cash. If your policy keeps part of the balance, such as a cancellation fee, that part moves to income.

Expirations and unredeemed gift cards. This is where the law comes in. Federal and state rules limit when gift cards can expire, and many states have unclaimed property rules that can apply to balances that are never used. Whether and when you can move an old balance to income, or have to report it to the state, is a question for your CPA or an attorney. Until they say otherwise, we leave it on the books as owed.

Cash or accrual is your CPA's call

What's described above is accrual-style bookkeeping. On strict cash-basis books, a package can be recorded as income on the day it's paid. Which method your books and your tax return use is your CPA's decision, and our guide to cash vs accrual accounting explains the difference.

Even on cash-basis books, you should know what you owe. We can keep the package and gift card balances from your software alongside your monthly reports, so the number is visible whichever method your CPA picks.

Common mistakes

• Booking the payout as income. The deposit is cash, not earnings, until the session happens or the card is redeemed.
• Recording the net amount. The client paid $500 even if $485 landed in the bank; the difference is a processing fee.
• Never checking the balance against the software. If the books and the booking app disagree on what's owed, one of them is wrong.
• Mixing promotional cards with sold gift cards. A free bonus card handed out with a purchase isn't cash you collected. Keep it out of the sold gift card balance and ask your CPA how to treat it.
• Writing off old balances on your own. Check your state's rules with your CPA or attorney first.

What to pull from your software each month

Square, Vagaro, Mindbody, MassageBook, Jane App and most practice management software can usually produce these reports, though the names vary:

• Sales by type, showing packages, memberships and gift cards sold
• Package or plan usage, showing sessions and visits redeemed
• Gift card sales and redemptions
• Outstanding package and gift card balances at month end
• Payout reports showing fees and refunds

How we handle it

Tracking prepaid balances is part of our bookkeeping for massage therapists. We record packages and gift cards as owed when they sell, move them to income from your software's reports each month, record memberships as they bill and reconcile everything to the bank in QuickBooks Online. You get a monthly P&L, a balance sheet that shows what you still owe in sessions, and books your CPA can work from.

The same setup works for care plans, session packs and wellness plans across our healthcare practice bookkeeping, and our solo entrepreneur bookkeeping covers independent therapists and trainers who run everything themselves. If you want to know what you really earned last month and what you still owe, that's where our massage therapist bookkeeping starts.

Common questions

Is a gift card income when I sell it?

Not yet. A gift card is a service you owe until it's redeemed, so it's recorded as a liability and moved to income when the client uses it. State rules on unredeemed gift cards vary, so ask your CPA or an attorney what applies to you.

What happens if a client never uses their package?

It stays on the books as owed until it's used, refunded or expires under your policy. Whether an expired balance can be moved to income, and when, depends on your state's rules and your CPA's direction. Until then, it stays a liability.

Do I have to use accrual accounting to track packages?

No. Whether your books run on cash or accrual is your CPA's call. On either method, we keep the balance you owe in sessions visible each month, pulled from your booking or practice software, and our bookkeeping for massage therapists is set up to work either way.

How do I record a monthly membership?

As income each month it bills, in its own revenue line. If unused sessions roll over, those banked sessions are owed too, and your CPA can tell you whether to track them like a package. Failed payments are tracked separately until they're collected.