Navigating Bitcoin Accounting: A Comprehensive Guide for Merchants
In today’s fast-evolving landscape, integrating Bitcoin into conventional accounting practices has become crucial for businesses embracing digital currencies. This guide delves into how merchants can handle Bitcoin transactions, focusing on three main scenarios: accepting Bitcoin in your local currency, treating it as a foreign currency account, and managing it as inventory.
In the examples below, we assume your reporting currency is your local fiat currency and Bitcoin is either a functional currency or an asset. It’s worth noting that different countries categorize Bitcoin differently, with FASB considering it an intangible asset.
Accepting Bitcoin in Your Local Currency:
When merchants accept Bitcoin payments converted into their local currency, typically through services like Strike, the accounting process follows these steps:
- Account Setup: Create a (cash & cash equivalent) entry under your cash current assets in your chart of accounts, labeled, for instance, “Strike” for your Bank Accounts.
- Scenario: A merchant sells a product for $100 USD and receives payment in Bitcoin via Strike.
- Accounting Entry:
| Account | Debit | Credit |
| Strike (Cash Account) | $100.00 | |
| Sales (Revenue) | $100.00 |
Utilizing services like Strike, which instantly and feelessly convert Bitcoin payments into the merchant’s local currency, ensures that the accounting entry mirrors a standard sales transaction in the native currency.
Accepting Bitcoin as Bitcoin is a different process. You remove counterparty risk but have to account for it differently. The FASB process is as follows:
- Account Setup: Create an intangible asset account in your chart of accounts, let’s say “Bitcoin,” and make sure you have another revenue and expense account for gains or losses of assets.
- Scenario: A merchant receives payment of 0.01 BTC (1,000,000 sats or 10,000.00 bits) for a product valued at $100 USD.
- Accounting Entry:
| Account | Debit | Credit |
| Bitcoin (Intangible Asset) | $100.00 | |
| Sales (Revenue) | $100.00 |
Upon converting Bitcoin to the local currency, any gains or losses due to fluctuations in Bitcoin’s value are recorded accordingly:
| Account | Debit | Credit |
| Bank (Cash Account) | $200.00 | |
| Bitcoin (Intangible Asset) | $100.00 | |
| Gain of Assets Sold (Other Revenue) | $100.00 |
That is great for the accounting balance sheet, but how do you keep track of the Bitcoin? You have two choices that will help you “inventory” your Bitcoin:
Managing Bitcoin as Inventory: Simple enough, make Bitcoin an inventory item and whenever you receive or sell/buy goods with it, do an inventory movement. Make sure your accounting software is connected to the correct intangible asset account; most will default to “inventory,” which is only acceptable for businesses whose principal revenue is selling Bitcoin.
Managing Bitcoin as a Foreign Currency Bank Account: Set up the currency and bank account in your system. Most systems won’t do 8 decimals, so denominate in sats (0 decimals) or bits (2 decimals). Make sure the account is connected to the intangible asset account and set gain or loss in the sale of assets, not the foreign currency gain/loss account.
In conclusion, accounting for Bitcoin transactions necessitates careful consideration of each business’s circumstances and objectives. Whether accepting Bitcoin as payment, treating it as a foreign currency, or managing it as inventory, merchants can employ various accounting methods to accurately reflect Bitcoin-related activities in their financial records. Understanding the nuances of Bitcoin accounting enables businesses to navigate the challenges and opportunities of the evolving digital economy effectively.
If this is complicated, consider using StrikeOut and let it automate the process for you, even if you are using self-custody. Accepting Bitcoin should be easy, and I want to provide the tools for free to make that possible!
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