Accounting for Barter Services & Hotel Rooms
Transactions are exchanges of economic resources called assets in between two consenting parties who stand to gain from the exchange in question. In most cases in the present era, one party is likely to provide cash in exchange for other resources such as labor and properties. Accounting for these transactions is simple because the amount of cash exchanged is the value of the transaction in question. Exchanges of non-cash resources is called bartering, and accounting for bartering is more difficult because there is often no clear indication of the fair value being exchanged between the parties.
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Fair Value
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Fair value is an asset’s theoretical value once the costs and benefits of its ownership are considered and included in the calculations. Different methods exist to calculate fair value for different assets because different qualities in assets mean that some methods are inapplicable or less applicable than others. Fair value is used often in accounting because financial statements must be accurate and reliable in order to be useful in financial decision making.
Fair Market Value
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Fair market value is perhaps the single most common measurement of an asset’s fair value, being the price for which it is sold on the open market. It is considered an accurate assessment of fair value so long as the transaction between the parties took place without coercion and there was no disparity in the information known to each party.
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Bartering
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Bartering is the exchange of non-cash assets for other non-cash assets. It is recorded on the accounts at the price or fair market value of the asset being received by the business in question. In the case of barter exchanges, credit received for providing non-cash assets is recorded in an asset that represents this credit, which is then deducted when that credit is used to acquire non-cash assets through the barter exchange.
Bartering For Hotel Rooms
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Assume a scenario where a man earns the usage of a hotel room in exchange for providing services to the hotel. If the rent paid to use that hotel room is $2,000 a month and the man is permitted to use the room in exchange for providing his services to the hotel, he records that as a $2,000 rent expense and a corresponding $2,000 in revenue. He records the transaction using the $2,000 because that is the usage of the hotel room’s fair market value.
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References
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