Let’s explore blockchain accounting and its impact on the financial sector.
Accounting is known as the “language of business” as it classifies, analyses, and records all business transactions. Moreover, the initial accounting can be found in ancient civilizations.
However, even with technological development, there has yet to be much advancement in accounting. We’re still following almost the same system for many centuries.
Finally, the introduction of blockchain technology is transforming accounting to another level. For example, the “Big Four” accounting firms, including Deloitte, Ernst & Young, PwC, and KPMG, are adopting blockchain to their system.
Let’s begin with the basics!
What is Blockchain Technology?
Blockchain is a distributed ledger technology that records and stores data. It consists of two major components; the block and the chain.
The block functions as the storage device for all the transactional data. Whereas the chain virtually connects two adjacent blocks.
In addition to data, each block contains hash and previous hash values. These values act as a digital fingerprint and protect from changing or removing data.
The major advantage of blockchain is that the data is shared across the network for verification. As a result, it’s virtually impossible to tamper with the blocks.
Let’s suppose a hacker tries to change the data of one block. In this case, that block will not be accepted as others on the network have multiple copies of the same data.
All these positive aspects make blockchain technology a great tool to enhance the traditional accounting system.
What is Accounting?
Accounting is the process that involves the recording and analyzing of all the financial transactions of a business. As a result, a smooth and convenient accounting system is necessary for the efficient functioning of a business.
Traditional accounting uses a double-entry system for financial transactions. This system has existed since the 13th century and uses two accounts for every transaction; credit and debit.
For example, suppose you spend $500 on an advertisement for your company. In this case, the credit balance decreases, and the debit balance increases by $500.
The double entry system helped to verify the financial condition by balancing the credit and debit entries. As a result, any mismatch in value will count as an accounting error.
However, this system also has major flaws that include:
- Errors: Recording errors are one of the common issues that double-entry systems face. As a result, it impacts the overall accuracy of the financial statements.
- Security: This two-entry system is also vulnerable to fraudulent activities while storing values. Moreover, it’s difficult to track the errors from complex transactions.
As you know, blockchain technology and accounting, let’s dive into blockchain accounting. Stay tuned!
What is Blockchain Accounting?
In simple words, blockchain accounting is implementing blockchain technology into the traditional accounting system. Here, the triple-entry method is used instead of the traditional double-entry method.
What is a triple-entry method? Let’s get into that right away!
As you know, a double-entry accounting method records the credit and debit values of a transaction. However, in a triple-entry method, an additional entry is added to the blockchain.
Professor Yuji Ijiri was the first to propose the triple entry concept in the 1980s. All the entries on the triple entry system are cryptographically secure. As a result, it is almost impossible to edit or remove any transaction values.
The simple rule of the triple entry system is that there must be three entries and three parties. Here, the three parties associated include the seller, the buyer, and the blockchain network.
Simply put, the seller and buyer record their credit and debit transactions like in the double entry system. In addition, the network records the total transactions in the blockchain.
Finally, the triple entry system has the combined advantages of the double entry system and blockchain technology.
Now, let’s explore the major aspects of blockchain accounting!
Features of Blockchain Accounting
The major features that help accountants with blockchain accounting consist of the following:
#1. Improved Security
Security is the prime feature that comes along with this accounting system. Here the blockchain network ensures the data safety of all financial transactions.
Strong cryptography safeguards the blockchain network from external attacks. Moreover, hackers can’t tamper with the values stored inside the blocks.
Here, the accountants and users of the same network can regularly verify the transactions inside the block. Finally, the network rejects data that shows unmatched transactions.
#2. Advanced and Accurate Accountability
The transactional data is stored in real-time after it gets verified by the network users. So, accountants can check the status of business transactions at any time.
Now with blockchain, accountants can complete their work immediately. For example, once new data is approved, it’ll be displayed on the network immediately.
The triple entry system helps you to analyze all the financial reports and government transactions of the company. Moreover, the network adds all the new data entries.
#3. Improved Trust and Transparency
The blockchain ledgers are open to everyone associated with the company. In addition, this transparency in accounting activities enhances trust among the founders, team members, and clients.
In addition, you can monitor all accounting entries in real-time without any delay. As a result, senior accounting team members can make efficient decisions during emergencies.
The transparency level at which blockchain operates also limits the chance of misunderstanding among accountants. After all, this trust factor increases the bonding of an organization.
#4. Advanced Control System
Blockchain accounting uses smart contracts, a program that executes the functions automatically. Moreover, this advanced technology helps to streamline audit and financial reporting processes.
You only need to deploy the smart contract based on the accounting format that your company operates. As a result, the blockchain stores all the transactional data that satisfies the conditions.
Finally, accountants can set a different set of instructions for important entries. Here they can opt for approval from higher authority for auditing purposes.
#5. Error and Fraud Reduction
As the copies of data are available to multiple users, there is no room for accounting errors. Also, each block is verified and validated by multiple users with network access.
As a result, mismatched data won’t be stored on the block. Moreover, any data tampering gets instantly detected during the validation process.
#6. Customizable Algorithm
Accountants can create custom algorithms and deploy them on the blockchains for specific functions. As a result, they can use different sets of algorithms for different clients based on the accounting requirement.
Moreover, once the algorithm is deployed, all the functions operate automatically without manual support. Therefore, the efficiency of overall accounting improves significantly.
Future of Blockchain Accounting
The future of blockchain accounting looks bright. Its major impact on accountancy includes:
#1. Wider Blockchain Adoption
The adoption of blockchain technology in accountancy is already in progress, led by the top players in the industry. Here, the accountants in the coming years will have much more clarity regarding maintaining the accounting ledger.
The Accounting industry will undergo training programs to upskill their employees. Consequently, accountants will adapt to technological advancement.
Furthermore, implementing blockchain technology also reduces the cost of maintaining records of transactions. Therefore, the time spent on recordkeeping can be utilized for other productive works.
#2. Efficient Accounting
Blockchain accounting authenticates every financial transaction from any part of the world within a short duration. Moreover, validators reject unauthorized data entries during the verification process.
Therefore, the overall efficiency of the accounting system automatically upgrades. Moreover, accountants can rely on the speed, safety, and authenticity of the new technology.
Overall, the benefits consist of:
- Less paperwork per transaction.
- Complete transparency on account details, invoices, and transaction values.
- All accountants of one company can access and review the transaction in real time.
- Enables auditors to analyze and verify transactional data smoother and faster.
#3. Impact on Audits
Auditors spend much time checking journal entries, trial balances, and supporting spreadsheets. The introduction of blockchain accounting helps them in a significant time reduction. As a result, auditors can spend their valuable time on other significant works.
In addition, the auditor can utilize the real-time data from the blockchains without searching for updated values. Therefore they have instant access to consistent and recurring live data.
Moreover, suppose an organization follows the same pattern of the audit process. In that case, an auditor can develop software that runs on blockchain. In this case, it reduces a lot of time and human effort.
#4. Skilled Workforce
The adoption of blockchain accounting demands skilled accountants and auditors. Therefore, the employees need to upskill to stay updated with the technology.
Professionals will be required to update their knowledge about machine learning, data analytics, blockchain, and other relevant technologies. Furthermore, accountants will be required to understand the working of smart contracts in a blockchain network.
Accountants will eventually need to represent as a mediator between clients and technologists. For this role, a strong understanding of blockchain accounting is necessary.
Final Words
Blockchain accounting is in its early stages to predict the exact impact on the accounting industry. However, the positive aspects of blockchain technology will play a major role in transforming traditional accounting.
Finally, introducing blockchain will add more trust, security, and efficiency in accounting, auditing, and assurance. Moreover, the technological impact improves the productivity and efficiency of the workforce.
Next, check out accounting terms you should know about as a beginner.
