What if accounting was on Blockchain?

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In a study published in 2016, it was predicted that blockchain technology would likely change the next decade of business in social media, big data, cloud technologies, robotics and even artificial intelligence. And we all know what blockchain is, the technology behind digital currencies like Bitcoin. But have we ever thought about blockchain in accounting?

It is true that while this technology has caught the attention of many of the largest financial institutions, most of the use cases have remained in experimental phases. But in this article, we will demonstrate the benefits of adopting blockchain technology for the specific use case of accounting.

Blockchain in accounting: the beginnings of this modern concept
Accounting began with the need for primitive man to inventory his herds to measure their wealth and its variation over time. It was a very simple registration system, very similar to a list of data as simple as quantity and price.

Single Entry Accounting Method
This type of recording became known as the single-entry accounting method, which is a simple and straightforward method of accounting in which each transaction is recorded as a single entry in a journal . This is a cash-based accounting method that tracks inflows and outflows in a journal.

Double share method
The evolution of accounting occurred very slowly. In the modern era, around the year 1500, Luca Paciolli created the double-entry method. This method completely changed the way accounting was done.

Double-entry accounting is a method of recording transactions in which, for each business transaction, an entry is recorded in at least two accounts as either a debit or a credit . In the double-entry system, the amounts recorded as debits must equal the amounts recorded as credits. Even today, accounting, even if supported by on-premises software (installed locally) or cloud technology, is based on the double-entry method.

Digitalization of accounting
Some of the reasons for the increase in digitalization in accounting are related to the strong regulatory requirements regarding the validity and integrity of accounting data. The entire accounting system is built to make falsification impossible or at least very difficult. And to this end, it relies on mutual control mechanisms.

Among other reasons, there is the systematic duplication of efforts, extensive documentation and periodic checks. Most of these are still manual and laborious tasks and far from being automated.

How can accounting be based on Blockchain?
Trust is one of the guarantees of blockchain and this feature is extremely relevant in accounting for the various stakeholders of a company , namely for auditors who are responsible for verifying financial information. Each audit is an expensive exercise, takes time, and requires extra work on the part of the company's accountants.

This justifies the implementation of blockchain in accounting, i.e. accounting based on Blockchain technology through, for example, the Triple Entry method . With blockchain in accounting, the recording of company transactions is carried out in a joint register between customer, supplier and, eventually, with the state, creating an interconnected system of lasting accounting records.

Just as a transaction is validated by a notary – electronically – falsifying or destroying a transaction to hide any activity becomes virtually impossible, as all records of entries are distributed and cryptographically sealed.

What are the benefits of blockchain in accounting for companies?
Standardization
Companies would benefit in several ways. First of all, standardization would allow auditors to automatically check a large part of the most important data that serves as the basis for financial statements.

Productivity
On the other hand, the cost and time required to carry out an audit would decrease considerably and auditors could spend their time in areas where they add more value, such as complex transactions or internal control mechanisms.

Trust
Blockchain as a source of trust can also be extremely useful in current accounting structures. Documents are encrypted in a shared ledger. There is no way for anyone to say they have lost them. Blockchain can gradually be integrated into typical accounting procedures, from ensuring the integrity of records to fully traceable audit trails. Eventually, fully automated audits could become a reality.

Security
Maintaining immutable records is a very relevant issue for accounting. Regulatory requirements for record keeping in Portugal, for example, require proof of immutability throughout the retention period.

For paper documents, the risk of unnoticed modification is considered comparatively low, due to their physical nature. In contrast, electronic files are especially vulnerable because they cannot be physically checked.

Digitization
Consequently, the digitization of paper records introduces the need for additional preventive measures. The result is a wide range of organizational, technological and procedural provisions. All preventive measures must be conclusively documented for third parties.

Unsurprisingly, many companies shy away from introducing a holistic electronic filing system, even though they are aware of the benefits.

Intelligence
Finally, blockchain technology enables smart contracts, or computer iran whatsapp number database that can be executed under certain conditions. Think of an invoice that is paid after verifying that the delivered goods were received according to specifications and that there are sufficient funds available in the company’s bank account.

Autonomy
There is no need to rely on a lawyer or other intermediaries to confirm any agreement. In fact, this also eliminates the risk of manipulation by third parties, since the execution is managed automatically by the network, and not by one or more, possibly biased, parties.

Transparency
The use of Blockchain in accounting makes it possible to easily prove the integrity of electronic files.

Traceability, security, digitalization and transparency
A great approach to ensuring these 4 characteristics is to generate a hash string of the file. This hash string represents the fingerprint of that file. This fingerprint is then immutably marked by writing it to the Blockchain via a transaction.

At any subsequent time, the integrity of this file can be proven by regenerating the fingerprint and comparing it to the fingerprint stored on the Blockchain. If the fingerprints are identical, the document has remained unchanged since the hash was first written to the Blockchain.