Accounting for barter transactions
The difficult economic climate in recent years has led more companies to use barter transactions, in which they exchange their products and services for other products and services. Many companies mistakenly 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 determine 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 exchanging. You are simply receiving an ineffective product in exchange for your product or service. Not counting barter transactions is equivalent to not counting income and expenses. It is impossible to determine how well your business is doing if you cannot generate accurate financial statements.
Recording these transactions is quite simple if you divide them into individual parts. When you barter, there are two transactions: 1) you sell something and 2) you buy something. The most confusing factor may be determining the value of the transaction. IRS 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 is the normal selling 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 must also 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 must record it as if you were taking cash out of your business (withdrawal, payroll advance, etc.). Let’s look at an example to see how it works in practice:
A designer is exchanging his website design services for two months of free rental. His rent is normally $ 800 a month. The designer would record the transaction at $ 1,600, the value of two months’ rent. Since rent is a business expense, you would debit “Rental Expenses” and credit “Income” for $ 1,600.
Barter exchanges are also becoming more common. When you trade through a barter exchange, you are exchanging “points” through a third-party organization. You can collect 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 is important to understand that barter income is based on cash. When someone “buys” your services with business credits or points, they have generated reportable income. The fact that you have not used up your business credit is not relevant. When you spend your business credit, you record the expense just as you would a direct business transaction (normal business expense or personal money order).
The easiest way to account for barter exchanges is to create a “bank” account on your books called “Barter exchanges.” When you sell something through an exchange, make a deposit in the bank account “Barter Exchanges”, crediting “Income”. When you buy something on the exchange, you can simply “write a check”, debiting the corresponding expense account. With this method, you have a complete record of all transactions that run through your barter account and have correctly recorded your income and expenses. You can also make reconciling your barter account part of your normal monthly closing process.
Proper accounting for both types of barter transactions is essential to accurately represent your income and expenses. When you record direct barter transactions, you are basically recording a sale and a purchase. Instead of recording two transactions, one in which you sold something for cash and another in which you bought something for cash, you record one transaction and omit the cash. Barter transactions are similar to cash transactions; you just need a barter bank account to register them. Remember to keep a paper record in any case and record it as a trade-in. For more information, see the IRS document “Record Keeping for Barter Transactions.”