For the first time since 1494, when Italian mathematician Luca Pacioli documented the concept of double-entry, the accounting profession is on the verge of being overhauled, and blockchain implementation is most likely to play a critical role in that change.
Discussions about replacing the double-entry accounting model began in the 1990s. In 2005, Ian Grigg, an entrepreneur, investor, and cryptographer, published a detailed white paper explaining the triple entry accounting model, a possible replacement for double-entry accounting.
The genius of double-entry is that financial records are kept in account pairs of debit and credit. The value on a debit account must always tally with the value on the corresponding credit account.
This arrangement of financial reporting helps business owners and auditors to avoid human errors and financial malpractices.
Indeed, the double-entry accounting model made it easy to make those in charge of day to day running of companies accountable. If there is a discrepancy between the values in debit and credit accounts, there is an error in the bookkeeping.
The double entry model has never been perfect, though. The financial scandals that come to light every now and then prove that. The challenge with the double-entry model is that financial records are silo-ed. Every business maintains its records independent of the other businesses it transacts with.
That means a skilled accountant can make and hide wrong entries. As long as the debit side balances out with the credit side, it might be difficult for anyone to discover an error.
Auditors often have to reach out to entities that transacted with the business they are looking at to confirm transactions. While this might help uncover errors, it comes at the cost of time, labor, and fees.
It is also likely that the other entities provide erroneous data, or they even decline to respond.
Long before the arrival of blockchain technology, Ian Grigg and others suggested triple entry accounting as the solution to these challenges. At the core of triple entry accounting is having a trusted third-party collect and store financial information on the dealings between businesses.
The trusted third party becomes the neutral source of critical financial data during auditing. That means if a business or organization makes hidden errors, records with the trusted third party will help uncover them.
The blockchain is the perfect third-party component for the triple entry model. Indeed, it offers a superior mechanism for triple entry accounting compared to what a centralized service provider is capable of giving.
Blockchain is a shared ledger of transactions or program states on a peer-to-peer network of computers. The computers on the peer-to-peer network update the shared ledger through a consensus mechanism.
The primary use case of blockchain in the accounting industry serves as the immutable, neutral, and trusted third-party source of the accounting truth in the triple entry accounting model. While serving in this role, the emerging technology offers the following capacities:
Transaction processing
Blockchain accounting allows financial transactions to be recorded on a shared ledger in real-time. The transactions that can be processed on the blockchain include the generation of purchase orders, invoices, and the actual payment settlement.
Accurate and secure record-keeping
The financial records on the blockchain become immutable, meaning they cannot be arbitrarily changed. The actual financial record files might not be stored on the blockchain ecosystem, but the platform can secure the files wherever they are stored using hash functions.
Also, because every change must be approved through a consensus mechanism on a peer-to-peer network of computers, the records are protected from hacking and actions by untrustworthy actors.
Smart contracts
The smart contract capacity on the Blockchain allows businesses to structure, execute and automate their interaction with clients in a way that all stakeholders agree on.
For example, a supplier of eggs and a restaurant can discuss the terms of their dealing and then have the transactions between them automated on the blockchain through a smart contract. Besides automating this process, the smart contract also records transactions and the data and makes them readily available to auditors.
Use of decentralized, distributed ledger technology.
The shared or distributed ledger becomes easy to use with multiple players. Indeed, the businesses in the entire supply chain of a particular good can access and provide data to the shared ledger.
An accounting system built and run on the blockchain partially or entirely can come with several benefits. The following are the most notable benefits available to accounting firms who utilize the new technologies:
A lot of manual labor goes into maintaining accounting systems. That includes updating all open accounts as transactions are processed. At the end of the financial year, the internal accounting professionals must reconcile the records and share the information with stakeholders.
Most of the tasks can be automated using smart contracts and machine learning on the blockchain. Also, mistakes and fraud are avoided as the blockchain is a neutral source of immutable data in a triple entry arrangement.
With accounting systems on the blockchain, artificial intelligence (AI), and automated processes, it is possible to cut down costs such as what is needed to reconcile records and auditing.
Since blockchain is an immutable neutral source of accounting data in a triple entry arrangement, actors in an organization will have to think twice before engaging in fraud activities. Meanwhile, transactions in the financial records of a business can easily collaborate with the financial records of the other businesses on the supply chain.
The transactions on the Blockchain are secured through immutability, consensus mechanism, hash functions, and cryptography.
Blockchain applications can make implementing triple entry accounting easier, less costly, and more efficient. In addition, the industry-disrupting technology offers added security and more ways to gather audit evidence.
Because of the potential impacts blockchain and triple entry accounting could bring to the industry, the accounting industry might have to adapt. In particular, accountants might have to do less bookkeeping and auditing because those tasks could easily be automated so that it is easy to authenticate records in real-time.
On the other hand, accountants might need to learn to code to not only write but also audit smart contracts businesses use to automate financial transactions. This could turn out to be a huge professional opportunity.
The Casper Network provides the capacity to support various business systems and digital assets on the blockchain.
Besides the foundational blockchain infrastructure, the Casper Network has the smart contract capacity, designed to be dynamic through oracles and future course corrections.
Image courtesy of Pixabay.
