Understanding Blockchain Accounting in Simple Terms

A network of connections representing blockchain accounting

By now, no matter what business you’re in, you must have heard of “blockchain technology”, or simply “blockchain”. Like most people, you have closely associated it with cryptocurrencies like bitcoin. But what exactly is blockchain technology?

Blockchain technology is a structure that stores transaction records, known as blocks, into different databases called chains in a network that is connected through peer-to-peer nodes. As an accountant, you may have dealt with a ledger; now, blockchain technology is also a ledger, except it is entirely digital. The owner will authorize every transaction in this ledger through a digital signature which subsequently authenticates the transaction and protects it from tampering.

In simpler terms, it is like a google spreadsheet that has been shared among many computers in a network. The interesting angle is, anyone can view the data but they cannot change or corrupt it.

The Emergence of Blockchain Technology

Over the past few years, blockchain became one of the most powerful ground-breaking technologies, changing business transactions and processes. Most manual transactions between two people require third-party authentication, and the same case would have applied to bitcoin, a currency used as an alternative to traditional money. At its core, blockchain provides people with a way to transact without the need of a third-party authenticator, as well as the security of a complete record of transactions that cannot be anonymously altered after the fact.

How is blockchain relevant to Accounting?

Blockchain is applicable in accounting because it has the capability to establish a clear trail of recording and reporting transactions. As the transaction is recorded through blockchain technology, any alteration in the transaction can be easily traced, which significantly minimizes the occurrence of duplicates or fraudulent transactions. Any changes in a transaction can be accurately pinpointed, and the responsible person can be easily traced.

Here’s an example:

Let’s assume Business “A” sells goods to Business “B” worth $10,000. “A” will record a sale worth $10,000 while “B” will record a purchase worth $10,000.

Once this transaction occurs, a shared digital ledger is created, known as a blockchain, which is accessible to both “A” and “B”, and both can see their accounting transaction through secured authentication. Both of their accounting systems will compare their ledger to this shared ledger, and if there is tampering, it can be easily identified. This is possible because the transaction was duplicated in blockchain technology and stored across various blocks of blockchain. If “B” enters the purchase at $9,000 by mistake, then the shared ledger will be out of balance and will instantaneously notify that “B” has posted the transaction at $9,000 instead of $10,000.

Each transaction in the blockchain is timestamped and stored sequentially and chronologically. All the blocks of the blockchain pass through validation rules, and after the transactions are validated, the blocks are updated, maintaining a complete trail of transactions. 

Enhanced Record-Keeping

The most significant advantage of blockchain accounting technology is the accurate record of ownership for various classes of assets. It accurately determines the details of the existing owner of assets, simultaneously giving details of all previous owners for the specific assets. This happens without the need for any third party to keep a watch over the transactions. Record-keeping becomes more transparent, secure and reliable in blockchain technology. Although this is a game-changer when it comes to auditing, the requirements for audit will likely remain.

Changing role of Accountants under Blockchain Technology

Blockchain enables real-time updating of bookkeeping records that are accurate, authentic and reliable, reducing the cost and oversight involved in the creation, maintenance, and reconciliation of ledgers overall. It will allow accountants to spend less time on “crunching the numbers” and focus more time and energy on big-picture services for their business and corporate clients. By focusing on business advisory services such as advising on product and profit margins, identifying cost and tax-savings opportunities, and identifying profitable avenues forward, accountants can help their clients grow more quickly. A good accountant with diverse experience can act as an experienced soundboard when it comes to future planning, and can also provide proactive advice, alerting business owners to opportunities they may not have been aware of. This new technology can provide more access to financial data that is easily accessible and reportable for easy comprehension, helping guide management for agile business decisions.

The Path Ahead

Accounting firms have already started brainstorming in the arena of using blockchain technology in the accounting domain. The audit trail can be established using blockchain technology, and it reduces the risk of fraudulent transactions to a bare minimum. Accountants can now use blockchain technology to review financial statements and provide their valuable inputs effectively. While conducting statutory audits, accountants can now focus on critical elements of financial statements rather than arithmetical accuracy. For government agencies and record-keeping agencies, blockchain accounting serves as a boon for reliable and transparent record-keeping that determines the ownership of assets. Blockchain technology can effectively revolutionize modern accounting systems and provide for a better, more robust and secured accounting environment.

CONSULT WITH A FINANCIAL PROFESSIONAL AT EDELKOORT SMETHURST SCHEIN CPAS LLP FOR MORE INFORMATION 

The Chartered Professional Accountants at Edelkoort Smethurst Schein CPAs LLP provide robust accounting and advisory services to businesses and other organizations, including tax planning, strategic advice, and audit and assurance services. To find out more about how we can help your organization identify opportunities for enhanced profitability and/or growth, contact us by phone at 905-517-2297 or reach out online.