Accounting for Barter Transactions

The difficult economic climate of recent years has led more
businesses to utilize barter transactions, in which they trade their
products and services for other products and services.  Many businesses
wrongly assume they don't need to account for these transactions. 
Accounting for bartering transactions is required by the FIRS and is
essential to accurately determining the financial health of your
business.

When you barter for other goods and services, you are
still investing time and resources to sell the item you are trading. 
You are simply receiving a commodity other than cash in exchange for
your product or service.  Not accounting for barter transactions is
equivalent to not accounting for revenue and expenses.  It's impossible
to determine how well your business is doing if you can't generate
accurate financial statements.

Recording these transactions is
quite simple if you break them down into individual pieces.  When you
barter, two transactions occur: 1) you sell something and 2) you buy
something.  The most confusing factor can be determining the value of
the transaction.  FIRS guidelines dictate that you must value the
transaction at the fair market value of the item you are receiving.  In
most cases, the fair market value is already known—it's the normal sale
price of the item.  The sale of your goods or services is valued at the
purchase price of the goods you are receiving. 

Of course, you also have to record the receipt of the item.  If the
item you are receiving is a valid business expense, you will record it
just as you would if you had paid cash.  Instead of cash, you paid with
your goods or services.  If the item you are receiving is for your
personal use, you need to record it as if you took cash out of your
business (draw, payroll advance, etc).  Let’s look at an example to see
how it works in practice:

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

Barter exchanges are also becoming more common.  When you trade via a
barter exchange, you trade for "points" through a third-party
organization.  You can accumulate points by selling your goods and
services to other members of the organization and apply those points
when you find something you want to buy.

If you trade with a
barter exchange service, it's important to understand that barter income
is cash basis.  When someone "buys” your services with trade credits or
points, you have generated reportable income.  The fact that you
haven't spent your trade credit is not relevant.  When you do spend your
trade credit, you record the expense just as you would with a direct
trade (normal business expense or personal draw).

The easiest
way to account for barter exchanges is to set up a “bank” account on
your books called "Barter Exchanges".  When you sell something through
an exchange, make a deposit into the “Barter Exchanges” bank account,
crediting “Income”.  When you purchase something from the exchange, you
can simply "write a check", debiting the appropriate expense account. 
Using this method, you have a complete record of all transactions
running through your barter account and you've properly recorded your
income and expense.  You can also make reconciling your barter account a
part of your normal monthly close process.

Properly accounting for both types of barter transactions is
essential to accurately representing your revenue and expenses. When
recording direct barter transactions, you are essentially recording a
sale and a purchase.  Instead of recording two transactions—one in which
you sold something for cash and one in which you purchased something
with cash—you record one transaction and skip the cash.  Barter exchange
transactions are similar to cash transactions; you just need a barter
bank account to record them.  Remember to keep a paper trail in either
case and note it as a barter.

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