Book keeping and accounting are an integral part of any business and household; it has been the same for centuries; bookkeeping is basically the process of recording transactional and other financial records, including billables, source documents, etc.
Blockchain is revolutionizing many fields, including gaming, finance, and essentially the whole internet. Bookkeeping is no different; blockchain technology has provided solutions to many problems that the current bookkeeping system or the Double Entry accounting system faces.
But to comprehensively understand the new triple entry accounting system, let us briefly look at the history of bookkeeping and accounting.
This system was mainly used since 5000 BC and became obsolete by around 1400 BC when Double Entry Accounting was introduced. However, evidence suggests that around 4 to 5 thousand years ago, during the Mesepotinian era, complex accounting of property purchases was inscribed on tablets.
A Single Entry Accounting system is when accountants rely on a one-sided accounting entry to maintain financial information; thus creating a complex system that is very hard to verify or examine accountability.
This system opened doors for malfeasance, which gave rise to frauds and scams. The problems that the modern financial world should not be able to tackle with Single Entry Accounting; hence came Double Entry Accounting.
The Double Entry Accounting system revolutionized the world of book keeping after the dawn of the renaissance period. Double Entry Accounting was introduced by a Franciscan Friar who identified and solved the problems posed by Single Entry Accounting around the 1400s. The Roman merchants rapidly adopted this new system; interestingly, our current accounting and bookkeeping systems are based on the concept of Double Entry Accounting.
The Double Entry Accounting system allows firms to maintain thorough records which reflect what the firm in talk owes and owns, their earnings, and spending; everything could be easily found out. Double Entry Accounting helped minimize the errors the Single Entry-based bookkeepers made since there are now two entries for every transaction.
This system, evolving over time, helped create relative transparency among the shareholders and the companies. But where are the company's records( which might be altered) enough for shareholders and outsiders to trust them? Hence, the concept of auditing firms was introduced in the 18th century.
Human errors might contort the financial outlook of a company. The double checking and balancing that is provided by the Double Entry Accounting system drastically reduce the scope of errors. Since this system's debit and credit statements are equal, errors can be easily detected and dealt with. However, it is essential to note that while the system allows relatively fewer errors, they are not completely eliminated.
Since the information is gathered directly from Double Entry transactions, it is easier to prepare financial statements. For a company, especially a listed one, it is vital for them to provide accurate financial statements on time since many factors ranging from investment to management decisions are established in well-kept books.
Auditing has been a significant factor for modern investments; the Double Entry bookkeeping system leaves a paper trail that opens itself up to auditing. Even on a personal level, it is easier to verify the ledger by following and investigating the transactions to see if the cash balance is higher or lower than expected.
Regardless of the problems it solved, the system is still not ideal; let us look at what are the disadvantages of the Double Entry Accounting system.
Double Entry Accounting, while more efficient, is still prone to error. Two different parties of two different organizations manage a single transaction which might lead to confusion and disorder.
There is not a mandate of full transparency by companies to the general public. If in case the books are purposely falsified, nefarious auditing firms might take a bribe; hence it is essential to build a trustless ecosystem that anyone and everyone can audit.
These and many other flaws have risen, and hence triple Entry Accounting was introduced; let us learn more about it and look at how it changes the accounting world for good.
The Double Entry Accounting, while relatively more efficient, is still prone to error. Records can be easily falsified under a Double Entry system; other discrepancies can also be found through detailed auditing, but the process is time-consuming, and yet the chances of finding these disparities are rare. Triple Entry Accounting is a scholarly concept introduced to solve most of the problems posed by the Double Entry system.
Notable accountant, author, and professor Yuji Iijiri provided a solution to the problems mentioned above. Ijiri's proposed triple Entry system stated that all transactions should be simultaneously posted in three ledgers, the two parties, and an independent recording entity. A legit trail would exist for every transaction that was made; auditing would be much more straightforward and even be potentially automated since a digital trail can be established.
Triple Entry Accounting involves cryptographically securing all parties' information and funds, making a trustless system via a smart contract to a third entry. Interestingly, the third entry acts as both transaction and invoice. Each part will have a receipt and act as proof of transaction between the two parties using the Double Entry Accounting system.
The reason why triple Entry Accounting is gaining attention again is because of blockchain technology. Blockchain has a seamless and secure way of recording across a network of multiple computers known as a distributed ledger.
Blockchain technology records entries in the same shared database in the distributed ledger as a transfer between wallet addresses. Blockchain helps create an interconnected network of permanent and objective-oriented accounting records which can be both public and private.
With blockchain, the power and jurisdiction do not rest in one party; the data is transferred to all related hosts. Hence, data is consistent and reliable across all companies because of smart contracts.
Since the data remains connected and immutable to all the associated parties, the chance of making a mistake or misunderstanding is astronomically low. As a result, data entry is more precise and less prone to errors and omissions.
It took centuries for the accounting world to identify and find a solution for Double Entry Accounting, and then it took decades to figure out how to work out the solution after blockchain gained popularity.
Triple Entry Accounting is a logical way to go; adding blockchain will reduce the complexity of the process. In addition, blockchain and Web3 can increase accessibility. While adoption of this system could be slow, it is highly anticipated.