From the printing press to the internet, disruptive innovation has been engrained in our culture for centuries. And with the rise of artificial intelligence, robotics, and other game-changing technology, there is no sign of slowing down. In the world of accounting and finance, one innovation in particular has a strong chance to shake things up: blockchain. Let’s take a look at what blockchain is and some of the ways this new technology can impact today’s accounting.
What is Blockchain?
At its most basic, blockchain is a high-tech ledger – a manual or electronic database to record transactions. It is a shared and decentralized ledger, which means no one person or central authority has control and a whole community can verify if transactions are valid or invalid.
The problem with traditional ledgers is that they can be tampered with. You can easily add, remove and edit a transaction in your ledger. Blockchain technology aims to solve this problem and ensure trust between business to business, person to person, person to business, etc. Every record on a blockchain ledger – or block – is timestamped, encrypted with impenetrable code, and linked to the previous block, which creates an unbreakable chain of records. Therefore, blocks within the blockchain are locked and cannot be altered.
How Blockchain Can Affect Accounting
Speed of Processing Transactions
As of now, processing transactions usually takes two to three business days, and sometimes even longer. With blockchain technology, transactions can be processed in real time. This means no more waiting for your bank account to show your current balance or for checks to clear.
In terms of taxation, if each blockchain transaction was taxed and remitted to the IRS as soon as it was recorded, quarterly tax returns may be phased out.
Since blockchain transactions are recorded in real time, they can be audited right away. To ensure transactions aren’t falsified, most public companies – especially with multiple investors – are required to be audited every quarter by an outside party. This way, investors in the business are provided with a sense of assurance and trust that the company they’re putting their money into is financially stable. A decentralized, immutable ledger like blockchain could render these quarterly audits obsolete.
This could also benefit small businesses because most cannot afford to hire an audit firm every three months. By having financial statements verified accurately and instantaneously, small businesses could easily manage having multiple investors just like larger companies and corporations.
Double-Entry Accounting to Triple-Entry Accounting
Modern accounting is based on the double-entry system, which is used to minimize errors on your business’ books. With blockchain technology, this traditional system will be upgraded to a triple-entry system. Let’s say you’re Company A and you buy supplies from Company B. Using double-entry accounting, you would log the cash you spent and the supplies you gained in your books, while Company B would record the cash they earned and the inventory they sold in their books. As a result, there would be two records of the transaction. If this transaction was made using blockchain, it would not only be documented on each party’s account but also on the blockchain network, creating a third record.
Triple-entry accounting would make bookkeeping more reliable because every blockchain entry is encrypted with code that makes it impossible to fabricate or erase information.