Barter – Definition

Cite this article as:"Barter – Definition," in The Business Professor, updated September 14, 2019, last accessed August 11, 2020, https://thebusinessprofessor.com/lesson/barter-definition/.

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Barter Definition

Barter takes place when a minimum of two parties exchange goods or services instead of using money as a medium of exchange. It means if a party offers a good and service to another party, the latter also offers some good or service in return.

For instance, a carpenter offering fencing services to a peasant. When the carpenter accomplishes the task of creating a fence for the farmer, the farmer (instead of making a payment of $1,000 to the carpenter) would give him crops that are worth $1,000.

A Little More on What is Barter

Barter system, being the foremost medium of commerce, was used back in times when money didn’t exist.  It is an approach that enables two parties to make negotiations for ascertaining the worth of goods and services, and then exchange them with one another.

Our older generations had a limited number of goods and services on hand to make an effective use of barter system. However, today, in the internet era, majority of the Americans can reach out to an infinite number of prospective individuals who can engage in barter system.

A good or service is eligible for barter if parties involved in the exchange of goods and services are fine with the set terms and conditions of the trade. Any person, organization, or even nation can make optimum use of this exchange that requires no money or hard cash. It is especially feasible for those parties who don’t have hard cash in hand for buying goods and services.

Benefits of Barter

The barter system helps individuals in trading products that they possess, but are not utilizing for products that they want to have. With this exchange of goods and services, they manage to keep aside cash for the expenses that bartering cannot pay. Also, bartering can have a positive impact on a trading parties’ psychological mindset by establishing good relationships among them. Also, it enables individuals to create professional links and connections, and promote their business activities.

Considering the wider perspective, bartering leads to an optimal utilization and distribution of resources carrying the same worth. This process can also create a situation of economic equilibrium, stating the demand becomes equal to supply in the market.

How Individuals Barter

When two parties or persons each have some product or service that the other party or person wants, both of them can ascertain the worth of both the products, and can offer the price that leads to an optimum allocation of resources. For example, if Mr. A has 30 pounds of rice, that after being valued is $10, he can exchange it with another person who wants rice, and is willing to trade it for something (that Mr. A needs) that is worth $10.

How Firms Barter

There can be times when organizations lack enough cash or credit for buying goods, and may consider using the barter system. This medium of exchange appears to be an efficient tool as there are no risks associated with foreign exchange. The most widely used example of B2B barter exchange involves exchanging advertising location. Usually, small organizations enter into a barter agreement to use business properties or sites of each other for advertising purposes. Besides B2B, barter can also take place between a company and a person. For example, an accounting organization can ask an electrician to offer wiring services in exchange of having an accounting analysis done.

How nations barter

When nations don’t have the money to repay their debts, or obtain adequate funds, they opt for bartering. Such barters take place in the form of one country exporting goods to another country in exchange for goods that it needs. This not helps in minimizing the debt amount, but also enables in creating healthy trade relationships with other countries.

The Implication of Bartering

According to the Internal Revenue Service (IRS), bartering is a type of revenue that is required to be included in the category of taxable income. As per the Generally Accepted Accounting Principles of the United States, companies should ascertain the fair market value of the products and services to be bartered. For determining the fair value, the person should consider the previous cash transactions of the same type of products or services, and then use that figure as a reportable amount. In case, it is not feasible to ascertain the right value of goods, they can use the carrying value for reporting purposes.

The IRS consider the worth of barters equivalent to the amount of U.S. currency for taxable purposes. The barter amount is considered income, and taxable in the fiscal year when the exchange of goods or services took place.

The IRS classifies the mechanism of bartering in different several types followed by a distinct set of rules and regulations. Most non-financial organizational revenue gets reported on Form 1040, Schedule C – Profit or Loss From Business. As bartering is taxable, it is important to have consultation services from a tax expert, and make the most out of the contract.

Steps in the Bartering Process

If you are planning to barter anytime sooner, here are a few handy tips that you should know before:

Find your goods

The first step involved in the barter system is to find out the goods or resources that you won’t mind offering to somebody else. Analyze all such items that you or your family members are not using anymore. In case, you are willing to provide someone your professional services, make an assessment of how you would value the service is some other person was offering it to you. Such skills or hobbies can vary from drawing, painting to photography.

Give it a price tag

Once you know which good or item you can afford to part with, consider finding out its real value. If the price is genuine and realistic, only then both parties will be interested in bartering goods successfully. If you are thinking to trade a good you already have, it will be right to go for its appraisal. It is so because the value of a product depends on how much someone is willing to buy it for. Hence, it is important to conduct a research beforehand, and browse through the eBay website for having an idea about the price of similar products or items.

For having an accurate estimate about your product, you can also consider approaching a professional in your local area. However, make sure to give them correct details about your expertise, and then ascertain the costs involved in the barter. For instance, shipping (for products), and inventory (for skill trade).

Know your requirements

You need to ascertain your requirements when considering a barter exchange. Several prospective services that you could use in the barter system are medical care, financial planning, computer repair, lawn care and maintenance, babysitting, car service, lodging, general repairs, tax filing, moving related help, and orthodontist service.

Look for bartering parties

Once you know which product or service you want to offer, and what you want in return in the barter process, look for a party with whom you want to barter. In case, you have no clue about the related person, go for the famous ‘word of mouth’ strategy. Tell your friends, neighbors, colleagues, etc. about what you need in a barter system. Also, you can use the power of social media, and post your requirements on several platforms including Facebook, Twitter, LinkedIn, and Instagram.

There are many e-swap platforms and e-auction sources like Craiglist.com, Swapace.com, SwapThing.com, Barterquest.com, Trashbank.com. Ourswaps.com and U-Exchange.com that you may consider checking. Find out if there are any bartering clubs in your area, and take the advantage. Besides, you can collect information about your local clubs from the Chamber of Commerce in your area.

Seize the offer

Now, the final step is to create a written agreement mentioning the details of goods and services traded, the date when they will be exchanged, or any consequences if any of the parties fails to comply with the said terms and conditions. If a barter-based membership organization is going to help you with it, then it is most likely that they will provide you with the required format and paperwork for the contract.

Drawbacks of bartering

However, bartering has a few drawbacks too. Large-scale organizations usually don’t prefer the barter exchange process. Also, there are small-scale firms who place restrictions on the value of goods or services for which they will consider bartering. This means that they may ask the other party to pay at least a portion of the amount instead of going for the complete barter of goods. But when the economy is slow, barter system proves to be an effective way for arranging goods and services without having the need to shell money out of the pocket.

If an organization doesn’t have enough tools to barter with customers directly, it has the option of swapping items or services with the help of membership-based trading exchanges like International Monetary System and ITEX. In case, it joins a trading network, the barter can take place for dollars. For performing each transaction, you need to incur minimal charges; the exchange makes it easier to swap and control tax-based elements of bartering like the issue of 1099-B form to the parties involved. For finding an exchange near your location, you may refer to the International Reciprocal Trade Association (IRTA) Membership Directory. Prior to registering and subscribing for the membership, you must ensure that its members have the goods and services matching your requirements. Else, you will be stuck with useless credit or barter money.

Reference for “Barter”

https://en.wikipedia.org/wiki/Barter

https://www.investopedia.com › Insights › Markets & Economy

https://www.mint.com/barter-system-history-the-past-and-present

www.businessdictionary.com/definition/barter.html

www.accaglobal.com/pk/en/business-finance/types-finance/bartering.html

Academics research on “Barter”

Sovereign debt as intertemporal barter, Kletzer, K. M., & Wright, B. D. (2000). Sovereign debt as intertemporal barter. American economic review90(3), 621-639.

Understanding barter in Russia, Commander, S. J., & Mumssen, C. (1998). Understanding barter in Russia. This paper analyses the incidence and growth of non-monetary transactions – barter, veksels, debt offsets, tax offsets and other monetary surrogates – in Russia. The empirical backbone of the paper is a survey of 350 – predominantly industrial – firms, carried out in October and November 1998. The paper provides an analytical framework for understanding both firm-level incentives for using barter and the reasons for its phenomenal growth since 1993. Having examined some of the costs of Russia’s non-monetary economy, the paper discusses a number of policy options.

Barter and monetary exchange under private information, Williamson, S., & Wright, R. (1994). Barter and monetary exchange under private information. The American Economic Review, 104-123. We develop a model of production and exchange with uncertainty concerning the quality of commodities and study the role of fiat money in ameliorating frictions caused by private information. The model is specified so that, without private information, only high-quality commodities are produced, and there is no welfare gain from using money. With private information, there can be equilibria (and sometimes multiple equilibria) where low-quality commodities are produced, and money can increase welfare. Money works by promoting useful production and exchange. In efficient monetary equilibria, agents adopt strategies that increase the probability of acquiring high-quality output.

Barter, Dalton, G. (1982). Barter. Journal of Economic Issues16(1), 181-190.

Clearing algorithms for barter exchange markets: Enabling nationwide kidney exchanges, Abraham, D. J., Blum, A., & Sandholm, T. (2007, June). Clearing algorithms for barter exchange markets: Enabling nationwide kidney exchanges. In Proceedings of the 8th ACM conference on Electronic commerce (pp. 295-304). ACM.

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