Blockchain based Accounting

Blockchain based Accounting

a Distributed Digital Ledger that you can Trust!

In the past, we always use to verify a paper or voucher or bill as an audit trail for an occurred transaction in a single-entry ancient book with trading journal. Justification of a transaction was based on notes or written text whether this much cash available or actually amount spent. The trouble with this approach was that cash flows didn’t provide complete information about operations

In the late 1400s, merchants in Venice developed a new method for tracking their finances: double-entry accounting, takes into account the other side of the transaction, which drives profits or losses and changes in owner’s equity. However, to trust the authenticity of the transaction we still have to rely on a supporting document as an audit trail that are kept either physically or digitally.

With a growing cloud technology and e-Sign, most of the documents are kept in soft formats (pdf, docs, jpg or png etc). Nowadays, most of these documents are online. In this digital age, its hard to trust and confirm that a PDF or JPG or screenshot is genuine. There has been a little improvement in encrypted method of verification of document using private/public keys technology, however still there is securitisation issue and can be tampered at later stages.

Evolution of Triple-entry accounting using Blockchain Technology:

The idea of Triple-entry accounting was first exploded in 1980s by Yuji Ijiri, but we missed it because it didn’t materialize due to lack of maintenance, complex framework, usability and affordability. At a high-level, triple-entry accounting is an alternative method of accounting in which a third component is added after the global standard debit and credit (double-entry bookkeeping).

Now thanks to blockchain, with flavour of technology this old concept can be widen in future with a tamperproof distributed digital ledger. Using this model, now all accounting entries involving outside parties can be cryptographically sealed and verified by a third party. This can generate a log using multiple string before and after of each process or event of transaction. Any modification or fabrication to the transaction or record will have strong audit trail footprint captured on blockchain.

What is Blockchain?

A blockchain is a digital ledger that is distributed among multiple locations using peer-to-peer network to ensure security and ease of access globally. Currently, the primary use of this technology is for bitcoin and other cryptocurrencies but blockchain will entirely disrupt accounting processes as we know them – it’s only a matter of time.

What is distributed ledger technology?

A distributed ledger is a database of transactions that is shared and synchronised across multiple computers and locations – without centralised control. Each party owns an identical copy of the record, which is automatically updated as soon as any additions are made.

How ERP business process can adopt blockchain:

The idea of blockchain technology can be adopted as a future workforce of business processes involving third-parties like banks, accountant, auditors, traders, vendors and customers.

Below are the inclusive list of business process where we always have multiple point of transaction (Contract, Purchase order, Sales order, payment etc.) entries are triggered at different level of event;

·        Procurement to Pay (P2P),

·        Order to Cash (O2C),

·        Business to Business (B2B),

·        Record to Report (R2R)

Example 1: Let me draw a scenario of P2P cycle info-graphic to understand it better

You can see in the drawing above, before and after of each process steps the transaction is locked & sealed by a hash-string of blockchain independently interlinked to all peer network. Hence every string has a copy of transaction interlinked and its very difficult to break or tamper the transaction once agreed and approved. There are some AI (artificial Intelligence) logic been leveraged to verify transactions if certain conditions are met. Hence, most of the task can be automated such as ledger analysis, goods verification, invoice verification, payment validation and trigger, Auditing etc.

Example 2: SAP has recently launched – SAP Leonardo,

a digital innovation system, includes some early-stage blockchain capabilities, and integrates them with other breakthrough technologies – such as the IoT and machine learning. SAP Cloud Platform also includes blockchain-as-a-service (BaaS) pilot is giving registered customers an easy way to experiment with the technology.

Example 3: Smart contracts;

Self-executing agreements based on blockchain technology – automatically trigger actions or payments once conditions are met such as invoice paying for itself after checking that delivered goods have been received according to specifications and sufficient funds are available on the company’s bank account.

In the near future, they will use real-time information, such as asset GPS data, to trigger an event, such as a transfer of ownership and funds.

Benefits of Blockchain based Accounting:

• Faster Processes – Record transaction in real time and between multiple parties can save time and cost
• Security – A tamper-proof and incorruptible technology
• Transparency – example of SMEs to gain quicker access of funding and provide financial information to lender
• Simplification in auditing – Quicker access for books with automated audit trail, Reducing an audit’s time and cost
• Help to reduce internal fraud – income & expenses require an encrypted signature
• Fewer Intermediaries – example of Debt can be more reliably traded as commodity in an open exchange, without needing third party credit assessment.
• Restricting infinite copyrights security of digital artifacts
• Automation – Trusting relationships with financial and commercials partner

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Study source of information:

• Forbes article -Triple-Entry Accounting And Blockchain: A Common Misconception 
• Ian Grigg – white paper – Triple Entry Accounting
• SAP Leonardo – Blockchain and Distributed Ledger Technology
• AIA worldwide newsletter