What’s it: A barter transaction refers to exchanging goods for goods without involving money as an intermediary. However, sometimes, transactions can also involve services, be it services with goods or services with services. One form of a barter transaction is a back and forth transaction. One sells an item in exchange for purchasing an identical item.
Bartering does not involve money to facilitate payment. Instead, the parties exchange their respective items. Although usually associated with traditional economies, barter transactions still occur in modern economies, although only a few.
Examples of a barter transaction
In a barter transaction, the exchange is reciprocal. It is fair trade, where each party gets the quantity of the goods they want according to the agreement.
In general, barter is a bilateral transaction; that is, it only involves two parties. But, sometimes, it can also be multilateral transactions, primarily through online sites as a medium of exchange.
Barter transactions usually involve the exchange of goods for goods. For example, you exchange your bread for your friend’s butter. In this case, you are involved in bartering. What is the quantity? It depends on your agreement with your friends. Another example, a farmer exchanges a basket of wheat for a basket of corn from another farmer.
In some cases, bartering also involves services. It can exchange services for services or services for goods. For example, suppose a computer shop provides computer equipment to a website owner. Instead of accepting cash payments, shop owners receive free advertising on customers’ websites.
In modern economies, a monetary crisis or depression usually increases barter transactions. During this period, the money supply shrank.
Also, bartering is favored when the value of money continues to decline due to hyperinflation. People prefer to hold things over money. Barter becomes a means to continue trade in goods and services and to keep a country functioning.
Accounting for barter transactions
Barter transactions are one of the issues in accounting. Because it does not involve money as payment, it is difficult to assess the price and quantify an item. So, in financial reporting, the problem arises, whether we have to recognize revenue or not.
Under IFRS, a company recognizes revenue from barter transactions. It reports it on the income statement based on the fair value of income from similar non-barter transactions with unrelated parties. In other words, we should judge it based on similar transactions involving cash.
Meanwhile, under the U.S. GAAP, a company recognizes revenue from barter transactions on the income statement at fair value only if it has a history of making or receiving cash payments for similar goods and services. That way, the company can use its historical experience to determine fair value. If not, revenue should be reported on the carrying amount of the asset given up.
Advantages and disadvantages of bartering transactions
Despite its pros and cons, bartering still appears in some parts of the modern economy. It may take place for commercial or non-commercial activities such as exchanging your goods for those of your friends.
Advantages of the barter transaction
Some of the benefits of bartering are:
- Improve cash flow. Barter does not involve money as a means of payment. It is an alternative in the modern economy. You can save your money for other purposes that cannot be through barterings, such as utility payments and loan interest. Bartering becomes even more important when the quantity of money or the price of money shrinks sharply.
- Avoid consumerism. Simple bartering works on the principle of reciprocity and involves the direct exchange of goods or services needed. You only need to find a counterparty and agree to deliver the goods. Bartering reduces waste because what you exchange is the item you need. Conversely, when you buy goods with money, you may be interested in buying other items, which may be less essential.
- Foster interaction and build networks. Barter is a way to build trust and deeper personal relationships between the parties involved. That kind of relationship might come in handy at a later date.
Disadvantages of the barter transaction
Inefficiency is a significant problem with bartering. When you trade, you have to find the right counterparty. For the transaction to take place, the counterparty has the items you need and needs your item. That’s a problem because it’s hard to find the right party.
Meanwhile, other downsides from barter transactions are:
- Unequal value. It is difficult to quantify the fair value of goods. For example, you exchange a shoe for a t-shirt belonging to your friend. In bartering, it’s probably a fair deal because you and your friend need each other. However, if cash, the value of your shoes may be higher than t-shirts. As a solution to such problems, modern economies introduce money as a means of payment, making the exchange more comfortable to manage. You only need to hand over the money worth the price of the goods.
- No cash receipts for the goods or services exchanged. That’s because you are not using money as a means of payment, and what you are exchanging has no measure of value (price).
- Indivisibility of certain goods. Some items are only interchangeable as a whole and cannot be broken down into smaller pieces to meet exchange requirements.
- Hard to keep wealth. Under the barter system, you store wealth in kind. Apart from requiring more space, items are also prone to be damaged or stolen. It’s different from money; you can put it in a time deposit without fear of being stolen or damaged.