Blockchain has gained much attention despite being a divisive technology and a nebulous notion for many. Most people adore it, despise it, or have no idea what it's all about.
Whatever your position on bitcoin, it's difficult to deny the expanding number of businesses that accept it. As a result, blockchain accounting has become a popular issue, particularly among accountants. Blockchain accounting is already being taught in schools and large accounting companies like Deloitte.
Though widespread adoption is unlikely shortly, it's becoming increasingly critical to grasp how blockchain technology might transform many areas of tax season preparation.
In this article, we'll look at how blockchain affects the accounting profession and the financial implications of this technology for small businesses.
Table of Contents
- How is Blockchain Technology Shaping the Future of the Accountancy Profession?
- What is the concept of Blockchain Technology?
- What is the Function of Blockchain in Accounting?
- What Impact Will Blockchain Have on the Accounting Industry?
What is the concept of Blockchain Technology?
The blockchain is a decentralized ledger that focuses on asset ownership and transfer. It stores transactional data in a nearly impossible-to-manipulate format.
Transactional data blocks are connected in chronological order. The technology is named after the blockchain. The blockchain database stores information from businesses and individuals all across the world.
Blockchain is a mentoring technology that links people or businesses directly or peer-to-peer. People have been sharing and distributing information for the past 20 years. They've sent emails, shared papers, and used social media. Blockchain, as a technology, extends the internet's interconnectedness one step further. Blockchain provides people with a value-based internet.
Blockchain allows for the easy and rapid completion of various transactions and the transfer of rights and property thanks to smart contracts. Participants may now trade value with one another instead of only exchanging information. Blockchain technology allows both applications (such as decentralized apps or dAPPs) and complicated programming while being most usually linked with Bitcoin and other crypto-assets (such as smart contracts).
Blockchain technology is sometimes referred to as a "trust machine" because of its immutability. The primary characteristic of blockchain is that everything saved on it will be there in perpetuity; the data is immutable, and you cannot delete it. The information held on the blockchain provides us with a level of transparency that has never been seen before. It also ensures that the record cannot be tampered with—no one can alter it.
The technology's decentralized nature is another essential characteristic. The information is not owned or controlled by anyone, company, or government. It implies that Person A, Person B, and the following person all have a duplicate of their information. In a decentralized system, everyone has access to the same information, and users may choose whether or not to share it. Data will no longer need to be collected and stored in central databases because you will keep it everywhere simultaneously and, if chosen, under direct user control rather than the service provider.
What is the Function of Blockchain in Accounting?
The 500-year-old double-entry accounting method might be replaced by blockchain technology. The triple-entry accounting system would gain popularity thanks to blockchain distributed ledger technology.
Due to time delays, reconciliations, and accounting entries, auditing needs the validation of transactions and balances on organizations' accounting ledgers at the end of the reporting period. Each party to the transaction maintains its own set of records.
With their near-instantaneous supply of an immutable record of transactions, blockchains allow for the sharing of transaction data that is automatically synced across several locations. This kind of information sharing eliminates transaction-level reconciliations and makes it easier to create continuous audits.
It opens up the possibility for auditors of moving from a periodic or annual exercise to a continuous process that may now include both parties to a transaction at the same time.
Since auditors' professional knowledge and experience are necessary to check the correctness of complicated accounting transactions, blockchain technology will not entirely automate accounting data reconciliation. The capacity to verify that both parties are recording the same basic transaction information and the real-time availability of this accounting data, on the other hand, provides enormous benefits in terms of reconciling and analyzing accounting data.
Imagine the capability of this technology paired with Artificial Intelligence (AI), were checking for inconsistencies via analytical review may happen in real-time, with no chance of missing transactions or the auditor having a blind spot in interpreting the data.
A general ledger (GL) is a collection of asset, liability, equity, cost, and income ledgers that provide a full set of financial transaction records. A double-entry accounting method would ensure that a GL is correct.
A debit and a credit of the same amount are recorded simultaneously in a double-entry accounting system. A triple-entry accounting system records a debit, credit, and third entry. The blockchain would be the third entry.
Businesses maintain their ledger to guarantee that their financial records are accurate and up to date. Standard accounting necessitates a large time commitment from all supply chain firms. Human mistake is also a possibility in this procedure.
What Impact Will Blockchain Have on the Accounting Industry?
The accounting sector may be affected by three important characteristics of blockchain.
- Smart contracts
- Decentralized, Distributed Ledger Technology
- Altering Transactions on the Blockchain
A smart contract is one of several blockchain applications that can help to automate time-consuming accounting operations.
It allows transactions to be completed automatically when specific criteria are satisfied. Accounting professionals and businesses may use this to automate tasks like payroll and reconciliations. It would save companies money on administrative expenditures associated with human entry mistakes. This program also protects firms and clients from scams and fraud.
Decentralized, Distributed Ledger Technology
One of the earliest widely used blockchain uses was eliminating the middleman in money transfers. You can transmit money peer-to-peer (P2P) without going via a credit card processor or a bank.
Although the middle man delays processes and charges fees for their services, they are not entirely negative. The intermediate man protects both parties in an asset exchange from fraud to a great extent. The security of blockchains is maintained by public witnesses known as miners. Miners take on the job of a central authority in transaction verification. It is accomplished safely by using a consensus protocol, a set of rules based on mutual agreement.
Altering Transactions on the Blockchain
The decentralized structure of blockchain also aids in serving as proof that a transaction took place.
We used to rely on paper receipts to prove that a transaction took place. Paper receipts were a little more difficult to mess with. With the development of digital payments comes the introduction of digital tokens, which are more easily tampered with. Blockchain technology, once again, appears to be a viable answer to this issue.
The immutability of blockchain stems from the fact that it's nearly hard to change or delete a transaction once it's been validated by a public consensus. The hash value will be affected if an organization updates a transaction's contents in the blockchain. It will raise an instant red alert that the data has been tampered with. Hashes are also widely used in passwords. A hash value is just a string of characters that has been created. It secures the transaction's sensitive data and serves as a receipt that certifies the transaction took place at a certain time.
How Will Blockchain Help Accountants?
Traditional accounting will continue to be useful in some areas. Traditional accounting and accountants are not intended to be replaced by blockchain accounting. Instead, it aspires to influence accounting procedures and record-keeping in the traditional accounting profession.
Accounting organizations, accounting professionals, and notable auditors will benefit from blockchain in accounting. Because a big part of audits is validating the existence and correctness of financial documents, this would allow the accountant to devote more time to other tasks. The use of blockchain technology will eliminate the requirement for paper trails since the blockchain will suffice to prove many aspects of a traditional audit.
How Blockchain in Accounting Can Assist Entrepreneurs
Blockchain accountancy can involve US dollars and other assets even if you aren't utilizing bitcoin. Furthermore, knowing the fundamentals of blockchain will enable you to keep up with future developments and be better prepared. Then, when blockchain technology directly influences your organization, you'll be prepared. It also saves time by reducing their time dealing with fraud or attempting to collect money from dishonest enterprises.
The data integrity of blockchain technology reduces the cost of regulatory compliance and allows accounting firms or auditors to conduct more efficient audits. It will avoid tedious tasks such as reconciling transaction data and manually entering data into your ledger. It means it will save time and make auditing your financial records much easier.
The usage of blockchain technology, artificial intelligence and, notably, machine learning is rapidly increasing. Governments are increasingly enacting blockchain-related tax legislation. It indicates that they are taking blockchain more seriously and that you should.
Blockchain accountancy can involve US dollars and other assets even if you aren't utilizing bitcoin. Furthermore, knowing the fundamentals of blockchain will enable you to keep up with future developments and be better prepared. Then, when blockchain technology directly influences your organization, you'll be prepared.