In the context of small businesses, what is bartering? Identify its advantages and disadvantages.
What will be an ideal response?
Barter is an increasingly popular method of financing small businesses. In its simplest form, bartering consists of two companies swapping items of roughly equal value. But as this age-old business practice has become more popular-partly because of the competitive global business environment-bartering has become more creative. Now business owners trade everything from employee perquisites to corporate airfare with barter credits.
Bartering has many advantages, such as business travel, debt collection, closing a sale, employee perks and bonuses, and a line of credit. As bartering has become more popular and complex, corporate barter networks, or regional trade exchanges, have developed to provide the needed exchange mechanism.
Bartering can be an accounting nightmare that must be carefully documented, and one must follow the rules:
1. If the items are dissimilar-a truck for a desk, for example-record the new asset at its documented fair market value and remove the swapped asset at its book value and recognize the difference as either a gain or a loss.
2. If the items are alike, record the new one at the book value of the old one and do not recognize any gain or loss.
The major disadvantage bartering faces is assigning a price tag to a product or service that is difficult to value.
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Fill in the blank(s) with the appropriate word(s).