| The difficult economic climate of recent years has | | | | Barter exchanges are also becoming more |
| led more businesses to utilize barter transactions, | | | | common. When you trade via a barter exchange, |
| in which they trade their products and services | | | | you trade for "points" through a third-party |
| for other products and services. Many businesses | | | | organization. You can accumulate points by selling |
| wrongly assume they don't need to account for | | | | your goods and services to other members of |
| these transactions. Accounting for bartering | | | | the organization and apply those points when you |
| transactions is required by the IRS and is essential | | | | find something you want to buy. |
| to accurately determining the financial health of | | | | If you trade with a barter exchange service, it's |
| your business. | | | | important to understand that barter income is |
| When you barter for other goods and services, | | | | cash basis. When someone "buys" your services |
| you are still investing time and resources to sell | | | | with trade credits or points, you have generated |
| the item you are trading. You are simply receiving | | | | reportable income. The fact that you haven't |
| a commodity other than cash in exchange for | | | | spent your trade credit is not relevant. When you |
| your product or service. Not accounting for barter | | | | do spend your trade credit, you record the |
| transactions is equivalent to not accounting for | | | | expense just as you would with a direct trade |
| revenue and expenses. It's impossible to | | | | (normal business expense or personal draw). |
| determine how well your business is doing if you | | | | The easiest way to account for barter exchanges |
| can't generate accurate financial statements. | | | | is to set up a "bank" account on your books called |
| Recording these transactions is quite simple if you | | | | "Barter Exchanges". When you sell something |
| break them down into individual pieces. When you | | | | through an exchange, make a deposit into the |
| barter, two transactions occur: 1) you sell | | | | "Barter Exchanges" bank account, crediting |
| something and 2) you buy something. The most | | | | "Income". When you purchase something from |
| confusing factor can be determining the value of | | | | the exchange, you can simply "write a check", |
| the transaction. IRS guidelines dictate that you | | | | debiting the appropriate expense account. Using |
| must value the transaction at the fair market | | | | this method, you have a complete record of all |
| value of the item you are receiving. In most | | | | transactions running through your barter account |
| cases, the fair market value is already known-it's | | | | and you've properly recorded your income and |
| the normal sale price of the item. The sale of | | | | expense. You can also make reconciling your |
| your goods or services is valued at the purchase | | | | barter account a part of your normal monthly |
| price of the goods you are receiving. | | | | close process. |
| Of course, you also have to record the receipt of | | | | Properly accounting for both types of barter |
| the item. If the item you are receiving is a valid | | | | transactions is essential to accurately representing |
| business expense, you will record it just as you | | | | your revenue and expenses. When recording |
| would if you had paid cash. Instead of cash, you | | | | direct barter transactions, you are essentially |
| paid with your goods or services. If the item you | | | | recording a sale and a purchase. Instead of |
| are receiving is for your personal use, you need | | | | recording two transactions-one in which you sold |
| to record it as if you took cash out of your | | | | something for cash and one in which you |
| business (draw, payroll advance, etc). Let's look at | | | | purchased something with cash-you record one |
| an example to see how it works in practice: | | | | transaction and skip the cash. Barter exchange |
| A designer is trading his website design services | | | | transactions are similar to cash transactions; you |
| for two months of free rent. His rent is normally | | | | just need a barter bank account to record them. |
| $800/month. The designer would record the | | | | Remember to keep a paper trail in either case |
| transaction at $1,600, the value of two months' | | | | and note it as a barter. For more information, see |
| rent. Since the rent is a business expense, he | | | | the IRS document "Record Keeping for Barter |
| would debit "Rent Expense" and credit "Income" | | | | Transactions. |
| for $1,600. | | | | |