Triple-Entry Accounting and Blockchain

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Triple-entry accounting is made possible by a technology called blockchain.

Technology is rapidly changing many aspects of business as we know it, and the field of accounting is no exception. One proposal involves changing the very nature of accounting to introduce more checks and balances and increase accuracy. Facilitated by technologies that have arisen in recent years, the move to so-called “triple-entry accounting” would change methodologies that have been in place for more than 500 years.

Candidates wishing to enter the field of accounting will need to understand the possibility—indeed, the likelihood—of this change, and will need to know how to cope with triple-entry accounting when the time comes. Programs such as the University of North Dakota’s Masters in Accountancy online can help professionals prepare. Offering a solid foundation in accounting skills along with general accounting terminology, this program can set candidates on the road to career success.

History of Accounting

Starting thousands of years ago, accounting was based on what is called a single-entry system. In other words, people simply kept lists of their transactions: one transaction resulted in one ledger entry. At the end of each day, week, or month, they added up the transactions to determine their overall financial situation.

The problem with a single-entry system is that it is prone to error. People can very easily forget a transaction or make a mistake. To solve this problem, a double-entry system of accounting was developed in the 1400s. In this type of system, each transaction is recorded twice. For instance, if a business purchases something for $100, that transaction is listed in one place as a debit, and in another place as the acquisition of a $100 asset. The two entries must be equal and must balance each other out. This technique vastly increased the accuracy of accounting and became the industry standard—and has remained so to this day.

Triple-Entry Accounting

But double-entry accounting, too, is prone to error, because a single transaction might be managed by two different entities in two different organizations. Records also can be fairly easily falsified under a double-entry system. Discrepancies may be found eventually through painstaking auditing, but the process is difficult, time-consuming, and far from foolproof.

To solve these problems, noted accountant, author, and former professor Yuji Ijiri proposed a more complex process in the 1980s. In Ijiri’s “triple-entry system,” all transactions would be simultaneously posted in three places: with the two parties to the transaction and with an independent recording entity. A trail would therefore exist for each and every monetary transaction an organization made. Auditing would be much simpler and could potentially even be automated because all records would be electronic and searchable.

The Role of Blockchain

Triple-entry accounting is made possible by a technology called blockchain. In blockchain, records are not held by one central agency. They are spread across multiple computer hosts—sometimes thousands of them—and as a result, these records are impossible to alter. Once an item enters the blockchain, it becomes a permanent and fixed record of a transaction.

Ben Taylor of Forbes Magazine explains that the arrangement offers several potential advantages. “A blockchain could be created once a contract is signed, then a purchase order could be issued against that contract, bills against that purchase order, payments against those bills, etc., tracking any issues that arise along the way. There would be a unique ID related to the contract/purchase order/bills in that chain to tie all of those separate pieces together,” he says. Additionally, “Having a ledger that easily shows the entire string of related transactions would not only provide excellent audit records, it would allow both parties to a transaction to have real-time status updates.”

The downside, says Taylor, is the added complexity of the process. “In my opinion, even if regulators and companies could get over the monumental hurdle of moving away from double-entry accounting, it’s impractical to use a more complex system. It’s hard enough to get the accounting right when there are only two sides of an entry,” he says.

What the Future Holds

Moving to a triple-entry system will be challenging, since it would involve a sea change in the way accounting is done worldwide. If the leap is made, however, there could be some significant benefits to business. Besides increased accuracy and transparency, proponents claim that the system would help with forecasting an organization’s future position. It would do this by going beyond simply pinpointing a company’s current financial situation, as current methods do. It would also provide a snapshot of the organization’s history and momentum which, when tied to current realities, would suggest how the organization is likely to evolve in the future.

At present, triple-entry accounting is mostly an interesting mental exercise. But changing technologies are helping this idea to move into the realm of possibility. Five hundred years is a long time for one method to reign supreme; many in the field think it might time for a new paradigm.

University of North Dakota’s Master of Accountancy online Degree

University of North Dakota’s Master of Accountancy (M.Acc.) online program helps students master accounting principles as well as related skills, such as GAAP compliance, for a successful career in accounting at the highest levels.

UND is accredited by the Association to Advance Collegiate Schools of Business International, which only recognizes about 30 percent of business programs in the United States. The Master of Accountancy online program offers practitioner and fundamentals tracks. Coursework is done online, which allows busy professionals to study accountancy and earn their degree without disrupting their work or personal lives. For more information, contact UND today.

Sources:

History of accounting – Systems Innovation

Triple-entry accounting – Forbes

The role of blockchain – Forbes

What the future holds – Warren Hencke