I was asked an interesting question recently and wanted to share my thoughts with you. The question was:
How do you believe that blockchain can change the traditional format of recordkeeping and would it be possible to create real-time accounting?
I answered by saying that blockchain or distributed ledgers will not change many things involved with traditional recordkeeping.
For example, the foundation of accounting in the form of double entry bookkeeping; where A=L+OE representing a foundational balancing of books will remain as will the need for the accounting profession to look at economic fundamentals in determining the appropriate accounting treatment via the accrual method. However, the use of the term “triple entry bookkeeping” by blockchain enthusiasts is incorrect and strongly rejected by the accounting industry. Adding a public timestamp and hash anchor to a record does not equate to triple entry. In addition, that term was defined many years ago and relates to accounting for projections of future impacts of events. The term has nothing to do with blockchain.
What blockchain or distributed ledger will impact is the ability to share transactions records between parties, removing disputes and the bane of all accountants’ existence – reconciliations.
Rather than each of us having a siloed accounting database where we each record our respective representation of a transaction between us, we share a single distributed system that is kept in sync – a blockchain or distributed ledger technology. The transaction itself is shared, and the accounting built on top of it; think order entry and not general ledger here. The accounting on top of these transaction logs is still done from the perspective of each entity and still requires accounting judgement from human experts. The biggest impact may be the ability to reduce the need for reconciliations – a mundane and painful process as both parties can agree to the transaction and others can be looped in as well – think banks and tax regulators. In doing so this also allows us to agree to a digital representation of value and ownership thereof at any point in time. More than just digital currencies this can encompass a wide range of property rights (land or car titles, my personal browsing history/reputation, a loan, etc.). Then we can exchange them with third parties as there is much less risk that any parties in the transaction disagree with the state of the asset/right prior to its transfer. Finally, blockchain networks allow the transfer to benefit from nearly instantaneous execution, clearing and settlement w/out intermediaries.
Questions like these are being addressed by ABC’s working groups such as the ABC Audit and Accounting Working Group chaired by Mark Li from BPM LLP. One of four ABC Working Groups, The Audit and Accounting Working Group reviews, discusses, documents, and shares best practices and guidelines on valuation and accounting treatment of digital assets, revenue recognition of digital assets, and asset classification.
I encourage you to find out more about our Working Groups and to get involved. In the meantime, please email us with your comments or questions about this blog to [email protected]. If you’d like to join ABC please follow this link for more information: https://members.accountingblockchain.net/default.aspx.