We are a retail store that give gift cards for donations and customer promotions, what is the correct je that should be made when these are issued?

For example a $500 gift card is redeemed the merchandise that they bought did not cost us the $500 maybe only $225 or maybe a little more depending on what they actually bought... any information would be a great help.

Oh, tricky one. Gift cards and certificates can cause a lot of headaches and I've seen CPAs argue over it. In terms of accounting rules, the only thing I'm aware of is that you can't count income until they are redeemed, because you've earned nothing until you exchange the goods. However, what you do with the gift cards themselves in the meantime is a different matter.

Let's assume for a minute that this is a small enough company that we don't have to get too terribly picky about it. If this were me working for a small company (and I've done this exact thing for a restaurant), I would do:

At time of issuance: Dr. Promotions or Advertising or whatever you want to call this. Cr. Gift Cards (liability account) or lump into "Deferred Revenues" if you have a such account.

At the time of redemption: Dr. Gift Cards, Cr. Sales for the retail amount ($500 in your example), then Dr. Cost of Goods Sold and Cr. Inventory for cost ($225).

This is based on an assumption of perpetual method. Your inventory costing method is not relevant because the only thing that is going to make a difference is that you're debiting Gift Cards instead of Cash or Receivables. Your costs aren't relevant to that entry.

Now, I must mention that I did find one place that for tax purposes (and I'm not a tax accountant so don't take my word on this one), that you cannot deduct the promotional expense until they are redeemed. So you'd have to make an adjustment for taxes. If you have a CPA doing your taxes, just mention it and that person knows how to take care of those book/tax differences cause they're common. In fact, if you have your own CPA, you probably should just ask that person about this - s/he might have a preference of how you handle this on the books.

You also should check with your state on their rules. You may end up with some issues for ones that aren't redeemed. I would keep track of them if I were you.