We all love getting something for free - or at least something we don’t actually have to put cash out for. It’s very common for small businesses to trade services/products (or even trade a business service/product for a personal one). This is all perfectly legal and is often beneficial to both parties...as long as it’s recorded properly in the financial records.
Any time you barter goods or services, you need to record the sale, the expense, and/or the personal benefit.
The fair market value of the services/products you provide from your business is a taxable sale, and if the service/product you supply is taxable for sales tax purposes, you must report that sale to the IRS as well to the state.
The fair market value of the service/products your business receives should be recorded as an expense on your books.
If the service/product received is for personal use, then the amount of the expense should be recorded on your books as a distribution/draw.
If the service/product provided is personal, then it is recorded as an owner/equity contribution.
Accounting software can make the “payment” of your invoice and expense difficult. While journal entries are always an option, they can be difficult and not accurately shown in certain reports. An easy solution is to create a “Bank” account in your chart of accounts called “Clearing Account.” You can then make and receive “payments” through this account. In the end, the balance in this account should be zero. If your bartered items differ in value, make the “payment” for the smaller amount on both the invoice and the expense/bill.
If you utilize Quickbooks Online, check out this video to learn how to accurately record these transactions:
Still confused about barter transactions? Let’s chat...we can help!
