Revenue from Bartering

Definition

The term revenue from bartering refers to the process of recognizing income associated with the trading of assets and services.  Bartering is more common in small business settings, where there may be non-cash transactions involving the exchange of goods or services.

IRS rules state companies and individuals must include in gross income the fair market value of goods and services received that are exchanged for goods or services provided under a bartering arrangement.

Explanation

Difficult economic times, as well as the ease of conducting transactions over the Internet, led to an increase in barter exchanges or clubs.  While these agreements may not include cash as part of the transaction, they do involve the exchange of something of value between two parties.  IRS rules dictate individuals and companies treat these transactions in the same manner as those involving the exchange of cash.

Bartering involves the exchange of goods or services between two parties.  Essentially, the transaction involves the selling of goods or services and the purchase of goods or services. IRS guidelines state the transaction must be recorded at the fair market value of the goods or services exchanged.  The fair market value is the item's "normal" selling price.

The item received must also be accounted for in the same manner as other business expenses.  Income derived from bartering is reported on IRS Form 1040, Schedule C, Profit or Loss from Business or Form 1040, Schedule C-EZ, Net Profit from Business.

Example

Bill is a professional photographer and provides retouching services through a barter exchange.  Each point on this exchange has a value of $1.00.  In January, Bill provided $3,500 in services to the exchange members, receiving 3,500 points.  The journal entry to record this transaction would be as follows:

  Debit Credit
Barter Exchange Account (Asset Account) $3,500  
Bartering Revenues (Income Item)   $3,500

In the journal entry above, the Barter Account is an asset account (like cash), while the bartering revenue is an income statement item.

In early February, Bill used 1,500 of his Barter Exchange points to purchase a new printer for his business.  The journal entry to record this transaction would be as follows:

  Debit Credit
Printer Purchase (Expense) $1,500  
Barter Exchange Account (Asset Account)   $1,500

Related Terms

revenues, revenue recognition principle