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Blockchain accounting has the potential to completely revolutionize the field of accounting as we know it.
Accounting has it’s roots firmly established in the financial world, and digitalization of accounting practices has been slower than other industries. Blockchain technology is one way to bring accounting practices into the digital world, saving companies money without sacrificing the precision that businesses demand.
Related resource: Top 10 Best Online Master of Accounting Degree Programs
Following is an explanation of blockchain electronic accounting, how it can change accounting practices, and the potential impact it can have on the financial world.
Current Accounting Practices
Currently accounting is based on a double-entry ledger system. When two companies enter into a transaction, they both record it from their own perspective. For example, when Company A sells something to Company B, then Company A records a sale (this is the credit) and a receivable (this is the debit). Company B records a purchase (this is the debit) and a payable (this is the credit). When the payment is made, Company A debits cash and credits receivables, and Company B credits cash and debits payables. This system is cumbersome, labor intensive, and has the potential for mistakes and fraud.
To ensure that the entries are recorded correctly and there is no fraud or mismanagement of assets, most companies either have an internal audit department or hire independent auditors to review their records. This can be extremely expensive. In addition, there is always a question of how valid the audits truly are. Since the company is paying for the audit, there is pressure on the auditors themselves to give the company the results that they need.
Blockchain technology has the potential to reduce the need for a 3rd party auditor to get involved to verify the accounting records.
Blockchain Electronic Accounting
Blockchain technology allows companies to write their transactions directly onto a joint register. This creates an interlocking system of accounting records instead of two separate and completely independent sets of books. All the entries are cryptographically sealed which makes it practically impossible to falsify or destroy records to conceal fraud. This frees up the internal audit department and independent auditors to concentrate on other aspects of the business such as internal controls instead of just reviewing pages of entries looking for mistakes or fraud.
Blockchain technology has the potential to save companies a substantial amount of money. It can also verify the integrity of the accounting records through the use of hashtags, or “fingerprints.” Using blockchain technology could even lead to fully automated audits in the near future.
Roadblocks to Blockchain
While there is huge potential in the accounting and auditing fields for blockchain technology, there are a few roadblocks. The first concern is where there is digital technology there is a potential for cyber-attacks. In addition, regulators and users alike need to get more comfortable with the digital technology behind blockchain accounting. Finally, blockchains themselves need to develop to the point where they can support such a huge network of financial transactions.
Summary
Bringing the accounting and auditing fields into the digital world has the potential for huge benefits for both the companies themselves and the investors in those companies. Blockchain accounting could be the game changing technology that these antiquated fields have been waiting for.