With the increasing use of Bitcoin and other cryptocurrencies, understanding blockchain technology is becoming crucial for accountants looking to land tech-savvy clients. Blockchain technology is becoming useful for more than just securing cryptocurrency transactions. Chartered professional accountants (CPAs) should also know about its applications in financial planning, record-keeping, and even tax audits.
What is Blockchain?
At its most basic, blockchain is an automated digital ledger. You can understand blockchain more easily by thinking of a double-entry bookkeeping system. In the double-entry system, each transaction recorded in a ledger has an equal and opposite transaction recorded in another ledger. For example, if a $20 purchase is recorded in a purchase ledger, $20 of sales income should be recorded in a sales ledger at the same time. The double-entry system uses the opposite entry to prove that a transaction occurred.
Blockchain works similarly, recording every transaction that passes through a computer in chronological order. However, instead of using a simple double-entry system to verify the transaction, blockchain uses a system of numerous computers communicating with one another. Whenever a transaction is completed, it’s 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. As long as the transaction appears identical on all systems, it is treated as authentic.
This decentralized ledger system can provide a great deal more security than traditional methods of bookkeeping. It does this by validating each transaction many times over, and also by making transactions very difficult to alter or falsify.
Public Versus Private
Blockchain technology can be divided into two main umbrella groups — public, and private. Both function using the same group validation system. The main difference is who can access the blockchain.
In a public blockchain, any computer can participate in the network. This system is ideal for publicly-traded currencies like bitcoin, because it allows for validation by the widest possible net 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 that are added 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. This way, you can limit the blockchain to only trusted computers on your own network. A private blockchain is generally more secure because it has fewer participants. When using blockchain for accounting and client record-keeping, you most likely want to use a private blockchain. This helps ensure that your client’s information is kept confidential.
Blockchain is a potentially useful technology for a range of accounting practices. It can take the place of traditional ledgers by automatically validating and recording any transaction that takes place on a business computer. This saves you the time of going 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 can also make it easier for accountants to work with companies 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 all 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. Understanding and effectively utilizing blockchain as an accountant can help you stay ahead of the technological curve and appeal to clients who are concerned about digital security and bookkeeping.