Terms like “Bitcoin” and “cryptocurrency” have made a huge impact in the financial world. Few people, though, understand or appreciate that blockchain technology, which is the software underlying Bitcoin and other cryptos, is fundamentally a system of accounting. Blockchain accounting methods are in fact so revolutionary that some believe they might end double-entry accounting’s 700-year reign.
As an accountant or auditor, you can adapt to stay competitive alongside blockchain. Thanks to the security and trust built into blockchain ledgers, your firm may even end up streamlining your services to stay competitive in a world of increasing data volume.
What is Blockchain Accounting Software?
Think of blockchain as an automated digital ledger. In a double-entry bookkeeping system, each transaction recorded in a ledger has an equal and opposite transaction recorded in another ledger. That means if you record a $20 purchase in a purchase ledger, you also note $20 of sales income in a sales ledger. The matching entries prove that a transaction occurred.
Blockchain works similarly. It also records every transaction that passes through a computer, and, just like with double-entry bookkeeping, it does so in chronological order. However, blockchain uses a system of numerous computers communicating with one another to record the transaction.
Every completed transaction is broadcast to an entire network of computers on a peer-to-peer system. Each participating computer shares information about the transaction with all the other computers. If the transaction appears identical on all systems, it’s verified as authentic.
The decentralized ledger system of blockchain provides a great deal more security than do traditional methods of bookkeeping because each transaction is validated many times over. In addition, transactions are very difficult to alter or falsify.
How Does Blockchain Accounting Software Work?
Any type of blockchain accounting software you choose to use has a unique feature: the ability to efficiently stack non-falsifiable accounting records. Each system is made of “blocks” of electronic transactions. These are verified independently and stacked together chronologically in a “chain” — giving rise to the name of the technology.
Every new transaction is added to a new block, and then each new block is added to the system. The blockchain software updates across every single computer, or “node,” so that everyone’s ledger has a record of everyone’s transactions in perpetuity.
Verification that blocks have been added to the chain varies across different protocols (proof of work vs. proof of stake, etc.). Some blockchain software attaches to other applications, such as smart contracts, which ensure that certain events, such as the filling of a production quota, automatically trigger payments between parties.
Open-Source Distributed Ledger
Many blockchain protocols exist on open-source software, which is software whose source code is available publicly and open to improvement from anyone. With an open-source accounting system, you can write your transactions directly into a joint ledger shared with other companies or organizations. This could simplify regulatory proceedings, public verification, and an interwoven register, all held together by an everlasting set of accounting records.
The blockchain supporting the popular Bitcoin cryptocurrency, for example, is available for free download into anyone’s computer. Any Bitcoin user can operate as a node and work to validate the most recent transactions. In this process, which is called “mining,” every single node updates in real time with the result of every bitcoin transaction. Once a block is “mined” and its transactions are verified, auditing work is not necessary.
The Future of Accounting
Some accounting and auditing firms have already embraced blockchain technology, realizing that blockchain transactions are simpler, more visible, and more transparent than traditional transactions. Improvements in blockchain’s operational efficiency mean that much of the work accountants do, such as collecting and inputting data, sampling, and proving provenance, can take place automatically. What does this mean for you as an accountant? It frees you up to provide valuable services to your clients.
Companies are using blockchain to improve enterprise resource planning (ERP), especially in areas such as supplier management and procurement. Some even dabble in cybersecurity and sustainable database planning with the help of blockchain tech.
Accounting education is also changing. Accountants may no longer need to memorize best practices pertaining to extensive documents and periodic controls. Blockchain education may become key to the training of accountants, with those accountants who understand blockchain most likely to succeed in a blockchain-recorded world.
With the increasing use of Bitcoin and other cryptocurrencies, understanding blockchain technology is now crucial for accountants who want to land tech-savvy clients. Chartered professional accountants (CPAs) should also know about blockchain’s applications in financial planning, record-keeping, and even tax audits.
Public Versus Private Blockchains
You can divide blockchain technology into two main umbrella groups — public and private. While both function using the same group validation system, they differ in who can access the blockchain.
Any computer can participate in the network of a public blockchain. That makes this system ideal for publicly traded currencies such as Bitcoin, because it allows for validation by the widest possible network of computers.
However, the sheer number of participant computers means that public blockchain networks are less secure because it’s impossible to tell who is participating. Additionally, the more computers you add to the blockchain, the more processing power it takes to validate a transaction.
Private blockchains restrict the participation of computers to those who have specific credentials. If your firm is part of one or more private blockchains, you can limit each blockchain to only the trusted computers on your own network. A private blockchain is generally more secure because it has fewer participants. For accounting and client record-keeping, you most likely want to use a private blockchain to keep your client’s information confidential.
Blockchain is a potentially useful technology for a range of accounting practices. Because it can replace traditional ledgers by automatically validating and recording transactions, you save time, since you don’t have to go through many different documents. Every transaction for a business client is available in one chain and already validated without you having to compare ledgers.
Blockchain accounting applications can also make it easier for accountants to file tax returns. With the work of authenticating transactions done for you, you can focus on finding inaccuracies or discrepancies in your clients’ transactions and ensuring that their tax information is correct. In the event of an audit, all relevant information is laid out in one convenient format.
Encourage your business clients to look into blockchain as a way of conducting transactions. As an accountant, your understanding and effective utilization of blockchain helps you stay ahead of the technological curve. It also makes your firm appealing to clients who are concerned about digital security and bookkeeping.
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