Accounting is a very conservative industry grounded on its long history. Nevertheless, there are aspects that can still be improved, such as the vulnerability of transaction records as it pertains to loss, destruction, tampering and integrity validation. Through blockchain, specifically with the triple-entry ledger system, these issues can be properly addressed.
Blockchain continues to showcase its usefulness in improving age-old systems. And with it being utilized to also devise innovative platforms to address chronic record-keeping issues across many different industries, it’s no wonder that the technology has found its way into the accounting industry.
Evolution of Accounting Entries
Speaking in a panel at CoinGeek Conference Zurich in June 2021, financial cryptographer Ian Grigg shared the evolution of accounting entries from single-entry to double-entry, and eventually, the triple-entry accounting.
Single-entry accounting, according to Grigg, is what ordinary people do to determine how much money or how many goods they have. It involves making a list of items with corresponding amounts, and then summing it down at the bottom.
Double-entry, meanwhile, divides that single-entry list into two with one list containing the assets while the other has the liabilities. These lists must match when laid out on the balance sheet. This “built-in redundancy mechanism” allows for detecting errors in either one of the lists.
Another panelist via online participation, Juan Ignacio Ibañez of UCL’s Centre for Blockchain Technologies, clarifies that bookkeeping involves the recording and keeping of the books while accounting is the intellectual process that “consists of the transformation and the processing of that information.”
Double-entry, when it comes to bookkeeping, is where every debit entry for an account requires a corresponding credit entry to balance the assets versus liability equation. This has been in use for over 500 years since it was first documented in Italy by Luca Pacioli in 1494.
It was around the 1990s, with the emergence of a combination of factors such as cryptography, the Internet and digital databases, that reliable records are enabled. “It was signed, and it was in data, and therefore, we could move to the next thing, which is adding protocols,” Grigg said.
The challenge with this setup, however, is when one of the trading parties loses the record and the other party decides to alter it. Thus, a third party is needed to “stamp and hold that record.” Eventually, Bitcoin and blockchain came along, realizing the triple-entry system by means of proof-of-work (PoW) as the third entrant.
As a digital public ledger, blockchain serves as the third party that completes the triple-entry ledger system that records each transaction into an immutable chain of data blocks within the network. Blockchain then is critical in the evolution of ledger systems.
The Future of Blockchain-Powered Accounting
Torje Sunde, CTO of Abendum, which created a triple-entry accounting platform, is another panelist in the said conference. He asserts that this system is quite efficient for accountants and auditors as it addresses problems on fraud, such as fake invoicing.
The panelists concur that the triple-entry ledger system can improve the accounting and auditing sectors and that they can even vouch for it. Considering how conservative the industry is, however, they do not really foresee this system replacing the proven, age-old double-entry ledger system anytime soon. In the meantime, it is an exceptionally viable tool for enterprises to utilize for better productivity and cost-efficiency.
Blockchain may have been gaining traction over the years, but with highly old-fashioned industries like accounting and auditing, blockchain-powered accounting systems shifting to mainstream could still take a while. Nevertheless, accounting on blockchain already indicates a promising future.
