Sometimes businesses work with other businesses in order to receive goods and services in lieu of cash. This is called bartering and is one of the oldest means of doing business in history. While most people think of bartering as something that went out of style, it has seen something of a resurgence in the wake of the pandemic leaving many small businesses strapped for cash.
So we at From Red To Black LLC are going to teach you how to record bartered services and goods in your bookkeeping.
To start with, we need to define why you need to record goods and services received via barter. The IRS makes it clear that even though no cash is being exchanged, bartered services and goods are considered something to be kept track of at the fair market value rate. In other words, when you barter you record the transaction at the normal price of whatever is exchanged—just like you would if you used cash or credit.
For example, let’s say that you run a marketing business but need some bookkeeping work done and normally you’d outsource it to a firm. Without bartering, the entry would look like this:
Jan 1st: Accounting Expenses $350
Cash Account $350
In the above example, you are paying for services using cash instead of credit or bartering. That’s an ordinary transaction. The Accounting Expenses is debited, which means it is increasing, since it’s a Expense account. The Cash Account is credited and thus decreasing, because it’s an Asset account.
Now, let’s say that you’d be willing to give the bookkeeping business your marketing services in exchange for theirs and they accept because they need marketing done that will potentially attract more customers. Now it’s a barter transaction and that change will need to be shown:
Jan 1st: Accounting Expenses $350
Marketing Income $350
In the bartering transaction, what is happening is that the Accounting Expenses are increasing because it is being debited like before. However, instead of the Cash Account being credited like the previous example, the Marketing Income Asset account is increased instead. That shows that you were compensated for your services despite cash not being exchanged. Simple, right?
However, the above only applies if you are doing a direct barter transaction. If you are using a Barter Exchange Service of some kind then it gets a little more complicated depending on how they tally the value of services or use points or something of that nature. You’ll have to take some additional steps by having a dedicated Bank Account and Income Account for it.
To reach a more solid understanding of this, let’s twist the above example a bit and say the marketing business is providing its services to another on behalf of the Bartering Exchange first. Then they request that someone handles their bookkeeping using the exchange at a later date:
Jan 1st: Barter Account $1000
Bartering Income $1000
Jan 31st: Accounting Expenses $350
Barter Account $350
In the above example, what is happening is that the marketing business performed services on behalf of the Barter Exchange. This generated income, but the value was accumulated in the Barter Account rather than the Cash Account. Then, when they needed bookkeeping done, they exchanged some of what was accumulated in the Barter Account as payment for the services listed under Accounting Expenses.
These are two of the simplest ways to record bartering transactions in bookkeeping. Whichever method you use, make sure to keep receipts and records of the exchanges because the IRS does expect the income generated to be recorded as it is taxable. For more helpful advice, feel free to subscribe and stay updated with new posts to our blog.
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