How Blockchain Is Changing Accounting

The phenomenal growth of blockchain technology raises both excitement and concern for the accounting industry. Will blockchain improve accounting efficiency? Or will it threaten the accounting profession — forcing accountants to seek new lines of work?

Just like blockchain itself, the answer is complex.

But one thing is clear though; blockchain is here to stay and has the potential to revolutionize accounting in ways that have never been seen before. In this post, we’ll discuss how blockchain is changing accounting.

Blockchain VS. The Current State Of Accounting

Blockchain, also known as distributed ledger technology (DLT), is a technology that enables the existence of cryptocurrency – the likes of Bitcoin.

In the current accounting, records are maintained and stored in a centralized location, typically in the database of an accounting software application. This model of accounting is based on a double-entry system.

Normally, the accountant will enter all records in the system and perform all the necessary changes as per the client’s needs. When accounting information is needed by the client or the regulator, the accountant will retrieve the data and avail it to the requesting party. Only the accountant and auditor have direct access to the centralized ledger.

Enter the DLT. Unlike conventional accounting, DLT takes a different, more modern approach. Records are entered, maintained, and stored in a distributed ledger which is made accessible to all the relevant parties. Blockchain thus employs a triple-entry bookkeeping model.

Typically, the accountant, auditor, client, and the regulator will have an identical copy of the ledger at all times. And the security is top-notch since blockchain technology utilizes private and public keys to authenticate users.

How Blockchain Is Changing Accounting

Today, blockchain is slowly paving its way into accounting and if fully embraced, it has the potential to change accounting forever. Take a look at how blockchain will impact accounting.

#1 Blockchain Will Render Audits Unnecessary

As mentioned earlier, blockchain transactions are stored in a shared ledger and made accessible to all authorized personnel.

The good thing about this is that all entries are distributed and cryptographically sealed, making it practically impossible to destroy or manipulate information. This will prevent people from cooking books and eventually render audits unnecessary.

The bad news; it may eliminate the need for auditors, or change their roles completely. Today, becoming an auditor requires you to pass the Uniform CPA exam, then go through the licensure process. The auditor of the future may need additional certifications in the field of blockchain.

It’s likely the auditor of the future will not even be an accountant but a blockchain expert trained to identify and report ways in which blockchain technology can be abused.

#2 Blockchain Will Facilitate Near Instant Transactions

At the start of every month, accountants around the world close the books on the previous month. For large corporations, this process may take anywhere from a couple of days to a week or longer.

Blockchain will completely change that.

The distributed ledger technology introduces real-time processing, so there will be no need for transactions to sit in limbo. That’s because digital records that incorporate blockchain provide for real-time settlement via the network.

For example, the current norm for clearing and settlement is 3 days. Blockchain will replace this ‘status quo’ with near-instant settlements that are favorable to businesses since they minimize overheads and eliminate delay-related errors.

#3 The Introduction Of Smart Contracts

A smart contract is a computer program running on top of a blockchain. These programs set rules for the contract and enforce the agreement once the rules are met. They will completely change how accounting works by replacing the normal financial transactions.

Essentially, a smart contract holds the funds and releases them once the conditions are fully met. For example, a contract can be triggered by the completion of a milestone or the results of a sports event. Smart contracts work in a similar fashion to the traditional escrow, only that they’re fully automated.

#4 Blockchain Will Usher In Triple-Entry Accounting Era

The current financial accounting is based on a double-entry system, which was introduced in the late 1400s. In double-entry bookkeeping, every entry to an account requires a corresponding and opposite entry to a different account.

However, blockchain is about to change that as it supports triple-entry accounting. This system adds another step that ensures all transactions are written to a blockchain. The triple entry is specifically for blockchain and is cryptographically sealed to protect the parties involved.

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