Accounting for Barter Trade
Barter trade occurs when goods are exchanged for another good or service. It differs from the traditional system of trade, where goods are sold for money, and it does not use global currency. Therefore, it requires a different type of accounting than a standard business transaction. In this article, we will look at the process of accounting for barter trade, including the types of records that should be kept and the methods of recording the transactions.
To begin, it is important to understand what barter trade is. Barter trade is the direct exchange of goods and services between two parties. Unlike traditional monetary exchange, barter trade uses the goods themselves as both the means of payment and the form of currency. When two parties enter into a barter trade, they agree to exchange goods or services of equal value. For example, a farmer may trade a bushel of grain for a basket of eggs.
Given the unique nature of barter trade, there are a few key concepts that must be understood for accurate accounting. The first is a barter agreement, which is a written contract outlining the terms of the exchange. This agreement ensures that both parties understand the type of transaction, the goods or services being exchanged, and the fair market value of those goods or services. These contracts are generally required for any barter trade that involves income or services.
Next, it is important to determine the fair market value (FMV) of any goods or services being exchanged in a barter trade. The FMV is the price a product or service would have if it were sold in the regular market. Determining the FMV of goods or services is the critical element that allows an accountant to properly record a barter trade transaction.
Finally, the bank account should be used to track the following information relating to any barter trade transaction:
• The type of tradable goods or services
• The amount of the transactions
• The dates that the goods or services were exchanged
• The fair market values of the goods or services exchanged
• The costs associated with each transaction
These records should be maintained for a minimum of three years for tax purposes.
Once the above steps have been completed, the barter trade transactions must be recorded in the company’s books. The most common way to do this is through an exchange of values journal. The journal should include all the goods or services being exchanged and their respective FMVs so that when the exchange takes place, the proper accounting entries can be made.
For example, if a farmer exchanges a bushel of grain with a basket of eggs, then the FMV of the grain will be entered into the journal as a debit, while the FMV of the eggs will be entered as a credit.
Another method of recording barter trade is through the use of barter accounts. These accounts are used to store the FMV of the goods or services being exchanged, and when the trade is made, the funds are transferred from the accounts to the respective parties.
Finally, it is important to track any taxes due from the barter trade. Depending on the nature and amount of the barter trade, a company may be liable for taxes on the goods or services exchanged. Companies should be aware of their local tax laws and consult a tax professional to ensure that all applicable taxes are being paid.
Barter trade is a unique form of transaction that requires special accounting and tax considerations. By understanding the process of accounting for barter trade and keeping proper records, a company can ensure that they are properly recording and reporting the transactions.
