Accounting for trade-outs, aka barter

You've heard the saying, "Cash is king!", and no one knows this better than startup and small business owners. Few have money lying around just waiting to be spent on advertising, bookkeeping help, or other services that would free up their time, and allow the actual business to get done. What to do, what to do??

As business owners network and meet other owners in similar positions, the idea of trading out services, aka bartering, almost inevitably comes up. It is certainly a viable option, and I do it myself, but with the following caveat: I always, always get an upfront agreement that we will invoice and pay each other for every job, or monthly billing. Doing so keeps the business transactions at arms' length - the way all business transactions should be - and is essential to accurately determining the financial health of the business, not to mention that it's required by the IRS.

Not accounting for trade-outs/barter is the same as not accounting for revenues and expenses: a sloppy no-no.

There's no magic to recording such transactions. When you receive your trade-out partner's invoice, you record the appropriate expense, and set up a payable. When you send out an invoice, you record the appropriate income, and set up a receivable. IRS guidelines dictate that the value of barter transactions must be a fair market value. In most cases that amount is already known - it's what you and the other party usually charge for such services or goods.

It is possible to accurately record barter without exchanging invoices and checks, but I've found that many of my clients do well to just take care of the basics: receive bills, pay bills, send invoices, deposit payments. Handling barter the same way as all other income and expenses keeps things routine, and they are not overwhelmed with journal entries or "Barter" bank accounts, etc. Let's keep this simple, Sam.

One of the best arguments for this handling of barter transactions is that you have accurate financial statements; your income and your expenses are accurately reflected. Should the time come when you want to switch vendors or service providers, you know exactly what you've been paying, and you'll know what kind of hit your income is going to take.

Another best argument is being in compliance with IRS guidelines. You need to keep a paper trail for all barter transactions and exchanges. For more information, see the IRS document Bartering Produces Taxable Income and Reporting Requirements.

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