Blockchain For Triple Entry Accounting

Blockchain For Triple Entry Accounting
Photo by JESHOOTS.COM / Unsplash

Most of the trillion-dollar accounting services industry relies on double entry accounting, a system that was invented over 500 years ago. Double entry accounting is the practice of recording both sides of a financial transaction by debiting one account and crediting another.

In comparison, very small businesses, such as a stall at a farmers market, may choose to rely on single entry accounting, which only records one side of the transaction. This system is much simpler and can be used by micro-businesses that don't have a lot of financial transactions.

As soon as a business grows and has employees and vendors, it needs to switch to double entry accounting in order to keep track of its finances.

Challenges with double-entry accounting

While double entry accounting is the backbone of modern day finance, it has its challenges, especially when it comes to invoicing.

Fraud is one of the biggest challenges with double entry accounting. In 2018 alone, businesses lost over $12 billion due to B2B invoice fraud. This type of fraud happens when a business is tricked into paying an invoice that is not legitimate, or double-paying an invoice.

It's not just small businesses that are vulnerable to invoice fraud. Even Facebook and Google were defrauded by over $100 million through fraudulent invoices.

Another challenge with double entry accounting is a lack of transparency. This can happen when businesses don't have a clear understanding of where their money is going, or when there are too many middlemen involved in a financial transaction. This lack of transparency can lead to discrepancies and errors.

The rise of blockchain technology has led some to believe that it could be a solution for the challenges faced by double entry accounting.

At its most basic level, blockchain is a digital ledger that records transactions. Each transaction is verified by multiple computers on the network, and then recorded in a block. Once a block is full, it's added to the chain of previous blocks, creating an immutable record of all the transactions that have taken place on the network.

How could blockchain help with accounting?

The "third entry" in triple entry accounting would be a hash, or a unique code that is generated when a transaction is recorded on the blockchain. This hash would act as a digital fingerprint, providing additional security and transparency.

A smart contract is used to turn an invoice into a non-fungible token, or NFT. This is a type of cryptocurrency that represents a unique asset, such as an invoice. If a business wanted to check whether an invoice was legitimate, they could simply check the hash associated with it. If the hash didn't match up, then the invoice would be considered invalid.

This system would also make it much harder for businesses to double-pay an invoice, as they would be able to easily track all the invoices that they've already paid.

In addition, triple entry accounting could help businesses to track their finances in real-time, as all the transactions would be recorded on the blockchain. This would give businesses a clear understanding of where their money is going, and help to prevent discrepancies and errors.

Simply put, triple-entry accounting automates and secures the accounting process by using blockchain technology. This could help to reduce fraud, increase transparency, and provide businesses with a clear understanding of their finances.

What businesses should use blockchain for accounting?

An old adage jokes that accounting is the second-oldest profession. As such, it can be difficult for digital transformation to take place in the accounting industry. Many businesses are still using paper-based systems, and there is a lot of resistance to change.

However, all firms can benefit from increased security and transparency, which is why blockchain for accounting is gaining popularity. In particular, businesses that are susceptible to invoice fraud or that have a lot of financial transactions can benefit from using blockchain technology.

In particular, DAOs (decentralized autonomous organizations) are well suited to blockchain accounting, as they are already decentralized by nature. Using centralized accounting software introduces unnecessary opacity, risk, and middlemen, which goes against the ethos of a DAO.

It's no wonder, then, that many financial services firms are already beginning to experiment with blockchain technology. JP Morgan, ANZ, and RBC, for example, are piloting blockchain platforms for blockchain-based payments.

As the world becomes increasingly digitized, it's likely that we'll see more businesses using blockchain for accounting. Sign up for Bulla Network or join our Discord to get started with triple-entry accounting today.