Accounting: Trading Goods and Services

(Reference: Record Keeping for Business Barter Transactions IRS.GOV on 6/1/12)

Often it makes sense for businesses to trade services or goods rather than exchange cash. This is considered a barter transaction. Businesses need to be sure that when they enter into this type of arrangement, it is recorded properly for both accounting and tax purposes. Here are some general guidelines as noted by Internal Revenue Service –

1)Be certain to clearly mark all trade related income and expense documents as “bartering,” and retain all original source documents pertaining to your barter transactions as you would with a cash transaction:

  • Sales receipts
  • Invoices

2) Treat all barter transactions as just another sales transaction of your business goods or services you must include in your income at the time received. This is true whether you use accrual-basis or cash-basis accounting.

3)Exchanges occurring through a barter exchange are reported to IRS on Form 1099-B and show the value of cash, property, services, credits or scrip added to your account by the barter exchange

Here is a very basic example of a goods and services trade:
Direct Barter Example: There is a trade arrangement made between a mechanic and a plumber. The mechanic will service the plumber’s company truck in exchange for re-piping work in the mechanic shop’s bathroom.
The fair market value of the mechanics work is $400 and the fair market value of the re-pipe job is $500. Both parties need to record the fair market value of their provided goods & services as income. And on the expense side, the fair market value of the mechanics work is taxable to the plumber, and the fair market value of the plumbing work is taxable to the mechanic. All pieces of the transaction should be noted on both parties’ books as a bartering transaction.
Note: there are several types of barter transactions and they can get fairly complicated. If your business is considering engaging in this type of goods & services exchange, you should be sure to check with both your accounting and tax advisors to be sure you are set up to capture everything appropriately.

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