Accounting for barter transactions

Accounting for barter transactions

The difficult economic climate of recent years has led to more and more companies using barter transactions, in which they exchange their products and services for other products and services. Many companies incorrectly assume that they do not need to account for these transactions. Accounting for barter transactions is required by the IRS and is essential to accurately determining the financial health of your business.

When you trade for other goods and services, you are still investing time and resources to sell the item you are trading. You simply receive a commodity other than cash in exchange for your product or service. The non-accounting of barter transactions corresponds to the non-accounting of income and expenses. It's impossible to determine how well your business is doing if you can't prepare accurate financial statements.

Recording these transactions is quite easy if you break them down into individual parts. In bartering, two transactions occur: 1) you sell something and 2) you buy something. The most confusing factor can be determining the value of the transaction. IRS guidelines require you to value the transaction at the fair market value of the item received. In most cases, the market value is already known - it is the normal selling price of the item. The sale of your goods or services will be valued at the purchase price of the goods you receive.

Of course, you must also note the receipt of the item. If the item you receive is a valid business expense, record it the same way you would if you paid cash. Instead of cash, you paid with your goods or services. If the item you receive is for your personal use, you must record it as if you had withdrawn cash from your business (drawing, salary advance, etc.). Let's look at an example to see how it works in practice:

A designer trades his website design services for free rental for two months. His rent is typically $800/month. The designer would record the transaction at $1,600, the value of two months' rent. Since rent is a business expense, he would debit “Rent Expense” and credit “Income” for $1,600.

Exchanges are also becoming more and more common. When you trade through an exchange, you are trading through a third party organization for “Points”. You can earn points by selling your goods and services to other members of the organization and applying those points when you find something you want to buy.

When trading with an exchange service, it is important to understand that exchange income is cash-based. When someone “buys” your services using trade credit or points, you have earned reportable income. The fact that you have not spent your trading funds is not relevant. When you spend your trading balance, record the expenses in the same way as if you were trading directly (normal business expenses or personal draws).

The easiest way to account for exchanges is to set up a “bank account” called “exchanges” on your books. When you sell something through an exchange, make a deposit into the Barter Exchanges bank account and credit “Income”. When you purchase something on the stock market, you can simply “write a check” and debit the appropriate expense account. With this method, you have a complete record of all transactions made through your exchange account and you have properly recorded your income and expenses. You can also make reconciling your exchange account part of your normal monthly closing process.

Proper accounting for both types of exchanges is essential to accurately reflecting your income and expenses. When you record direct exchanges, you are essentially recording a sale and a purchase. Instead of recording two transactions - one where you sold something for cash and one where you bought something with cash - you record one transaction and skip the cash. Barter transactions are similar to cash transactions; You only need an exchange bank account to record them. In any case, remember to keep a paper trail and record it as an exchange. For more information, see the IRS document “Records for Exchange Transactions.”