A barter transaction takes place when a business provides its goods or services in exchange for a non-cash consideration, usually other goods or services. Since an accounting transaction has taken place the event needs to be recorded in the bookkeeping records of the business.
Barter transactions usually take place at the fair value of the goods or services involved.
Barter Transaction Accounting Example
Suppose a business agrees to provide goods with a selling value of 1,000 and cost of 400 to another business in return for the provision of advertising services of a similar value. In this case the fair value of the exchange is 1,000, the selling value of the goods and the advertising services involved.
The accounting records will reflect two entries in relation to the bartering transaction as follows.
- Sale of goods at fair value (1,000) to the other business.
- Purchase of advertising services at fair value (1,000) from the other business.
In order to process and keep track of the bartering transactions it is necessary to establish a barter control account in the chart of accounts.
1. Sale of Goods at Fair Value Barter Transaction
The business records the sale of its goods at fair value.
|Barter Control Account||1,000|
The debit entry represents the amount due to the business in respect of the sale. In this case the amount is debited to the barter control account to reflect the fact that the business plans to receive payment for the goods by way of barter exchange for other goods or services.
The credit entry is to the sales account representing the fair value of the goods to be exchanged.
Cost of Goods Sold
Although not directly related to the bartering transaction, it should be noted that the business must also record the cost of goods sold (400) in a separate transaction. The method of recording the cost of goods sold will depend on whether the business operates a periodic or perpetual inventory system. Details of this transaction can be seen in our post on the inventory accounting system.
2. Purchase of Advertising Services at Fair Value Barter Transaction
The business records the purchase of advertising services at fair value.
|Barter Control Account||1,000|
The debit entry represents the cost of the advertising services to the business.
The credit entry represents the amount owed by the business in respect of the purchase. In this case the amount is credited to the barter control account to reflect the fact that the business plans to make payment for the services by way of barter exchange for other goods or services.
It can be seen that after processing the two transactions, the balance on the barter control account is now zero and the net effect is to debit the advertising expense and credit sales.
The Accounting Equation
The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each transaction.
The accounting equation for the two barter transactions is shown in the following table.
In this example, on the left hand side of the accounting equation the barter control account increases and decreases by the same amount reflecting the exchange at fair value (1,000) of the goods in return for the advertising services. The net effect on the barter control account and the left hand side of the accounting equation is zero.
On the other side of the accounting equation the net income is increased by the value of the sales and is correspondingly decreased by the value of the advertising expense. The net effect on net income, retained earnings and therefore equity is zero.
Popular Double Entry Bookkeeping Examples
This barter transaction journal entry is one of many bookkeeping entries used in accounting, discover another at the links below.
- Barter Transaction Accounting
- Fixed Assets Purchase Incurring a Liability
- Purchase Office Supplies on Account
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.