Not all transactions of goods or services involve a monetary medium, such as dollars. Sometimes, companies exchange saleable goods for each other, an act that is considered a barter trade. This type of transaction presents a problem to accountants: Should the revenue be recorded based on the fair market value of the good traded? What forms are you required to fill out for tax purposes?
The Internal Revenue Service has ruled that companies and individuals must include the fair market value of all received goods and services exchanged for all provided goods and services – in short, you need to keep track of the value of barter transactions.
Example: Internet Advertising Space
One common contemporary example of barter transaction involves two different Internet companies that exchange ad space on each other's websites.
Both ad spaces have a market value, though they are not necessarily the same. Moreover, the value of ad space fluctuates rapidly, which can sometimes lead to difficult estimations for their value. In 1999, an FASB task force ruled that revenue needs to be reported only if the fair market value of the ad space given up is determinable based on the company's history of receiving cash (or a good readily convertible to cash) for similar ad space.
If your company usually received $100 for an ad space and then barters away a similar ad space, the IRS wants to see that transaction recognized as earning $100 in revenue.
Recording Barter Revenue
Barter revenue is accounted for, in dollars, on IRS Form 1040, Schedule C, Profit or Loss from Business. In some cases, it could also be recorded in Schedule C-EZ, Net Profit from Business (also in IRS Form 1040).
In a standard journal entry, a barter exchange account is treated as an asset account, and the bartering revenues are treated as income items. In the example given above, the barter exchange account would be debited $100 and barter revenues would be credited $100.
If a company fails to record a bartering expense properly, it can correct its return by filing a Form 1040X with the IRS.
Barter Exchange vs. Trading Services
The IRS differentiates between trading services between two parties on a non-commercial basis and the act of using a saleable business goods or services in an barter exchange, as described above.
If a company or person simply trades services, the IRS sometimes requires a Form 1099-MISC.
If a company or person engages in barter exchange, a Proceeds From Broker and Barter Exchange Transactions, also known as a Form 1099-B, must be filed.
A comprehensive resource for the tax treatment of barter transactions and revenue accounting can be found in IRS Publication 525, Taxable and Nontaxable Income.