• Andrew Jordan

How to Record Trade with Other Businesses

Updated: Mar 1, 2019





This is something that a lot of businesses want to do (I’ll trade my Accounting services for your Legal services, for example).

The IRS is very clear that bartering or trading goods or services creates taxable income. Basically, the IRS views a trade as though you actually sold your goods or services, then turned around and bought the goods or services from the other business. You are also required to count services you bought using trade in your 1099 totals. In other words, not recording barter transactions could subject you to fines and penalties from the IRS.

These instructions are specifically for QuickBooks, but can be applied to most accounting software even though some of the terms might be a little different.

  1. Record an invoice as if you were selling your goods/services. Use the customer name and whatever income account you would if you have made the sale normally for cash. When setting up the customer, put “Customer” at the end of the name. (e.g. Jordan CPA Services Customer)

  2. Record a bill as if you were buying the goods/services you will be receiving. When setting up the vendor, put “Vendor” at the end of the name. (e.g. Jordan CPA Services Vendor) Use the expense account you would have used if this were not a trade transaction (e.g. if you received Legal advice in trade, use the Legal Services expense account). If what you are receiving is not a business expense (like when I trade my professional services with my photographer in exchange for family photos I use personally) then the account to use on the bill will not be an expense account. Instead, use an Equity account called “Distributions” “Member Distributions” “Owner’s Pay and Expenses” or something like that.

  3. You’ll need to first set up an “Other Current Asset” type account called Trade Receivable in your Chart of Accounts and set up a product called Trade that connects to this account. Then create a Credit Memo for the amount on the invoice.

  4. Apply this credit to the invoice. Do this by going to Receive Payment, then selecting the customer and applying the credit. To make sure you did this correctly, look at your Accounts Receivable Aging and make sure the invoice does not still show up as outstanding (if it does show up as outstanding, check that the dates on your report are after the date of the Credit Memo you created).

  5. Create a Vendor Credit for the amount of the bill. Use the same asset account from step 3, Trade Receivable.

  6. Apply the Vendor Credit to the bill. Go to Pay Bills, select the vendor, and “pay” the bill using the Vendor Credit—make sure you don’t accidentally tell QuickBooks to pay the vendor with cash. To make sure you did this correctly, look at your Accounts Payable Aging and make sure the bill does not still show up as outstanding (if it does show up as outstanding, check that the dates on your report are after the date of the Vendor Credit you created).

Why should you record these transactions? The same reasons you should record all of your transactions: it’s the right and honest thing to do, having accurate books can help you get business loans (and avoid committing bank fraud), you’ll sleep better at night, and it will help when you sell your business when the time come, but this is a topic for a whole separate article, which I’m working on.


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