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 determining the financial health of your business.

When you trade for other goods and services, you are still spending time and resources to sell the item you are trading. You are simply receiving a non-cash commodity in exchange for your product or service. Not accounting for barter transactions is equivalent to not accounting for income 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 parts. 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. 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 receipt of the item. If the item you’re receiving is a valid business expense, you’ll record it just as you would if you paid cash. Instead of cash, you paid with your goods or services. If the item you are receiving is for your personal use, you should record it as having cash drawn from 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 rent. His rent is normally $800/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 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 is important to understand that barter income is in cash. When someone “purchases” your services with business credits or points, you’ve generated reportable income. The fact that you have not spent your business credit is not relevant. When you spend your business credit, you record the expense just as you would a direct transaction (normal business spend or personal withdrawal).

The easiest way to account for barter trades is to set up a “bank” account in your books called “Barter Trades.” 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 appropriate expense account. With this method, you have a complete record of all the transactions that take place through your barter account and you 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 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 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 write it down as a barter. For more information, see the IRS document “Recordkeeping for Barter Transactions.”