SUMMARY
- What is accounting?
- Basis of accounting
- Accounting history
- Types of accounting
- Digitalization of accounting
- What is blockchain?
- Blockchain vs Database
- Accounting and blockchain implications
- Non-fungible-token invoicing
- Adoption of Blockchain
What is accounting?
Basis of accounting
Accounting is about studying money. What comes in and what comes out. What you put in your pocket and what you take out your pocket, but with a proof.
In order to get that proof, you have to track the money inflows and outflows, which means you do a process that includes recording money transactions, called guess what, accounting.
If you want to know where your money is flying, you better learn accounting. Of course, this can be done for both individuals and institutions, but with different principles.
When I say with accounting we study money, I mean anything that includes a financial activity from buying products, goods, services, taking a loan, having a debt, waiting for a payment, taking your payroll to investing in assets like stocks, bonds, real estate, cryptocurrencies, start-ups or trading assets or commodities or futures and also confronting with taxes in any financial activity, which we know that they are changing at a high rate and they are too big.
For example, tax accounts find little gaps to legally lower your taxes, bookkeepers just record how much you spend or receive and for what, financial accounts give you clarity regarding on what bookkeepers do, meaning they create three magic tables called balance sheet, income statement and cashflow statement that show exactly where your money are or aren’t, what you did to them and finally we have managerial accountants, the ones who make accounting strategies to minimize your spendings and increase your income. Remember, instead of ‘you’ can be ‘businesses’.
Congrats, now you know 5 types of accountants!
Accounting brief history
But where did accounting start? And why? Do we actually need it?
Accounting has been around almost as long as money itself.
Accounting history dates back to ancient civilizations in Mesopotamia, Egypt, and Babylon. For example, during the Roman Empire, the government had detailed records of its finances. However, modern accounting as a profession has only been around since the early 19th century.
Luca Pacioli is considered "The Father of Accounting and Bookkeeping" due to his contributions to the development of accounting as a profession. An Italian mathematician and friend of Leonardo da Vinci, Pacioli published a book on the double-entry system of bookkeeping in 1494.
Types of accounting
Nowadays, three types of accounting exist.
At first, it was used single-entry accounting, which meant tracking businesses’ assets, liabilities, income, and expenses by recording each transaction one single time, credit or debit. As its name suggests, it lists income and expenses in a single row, with positive values for income and negative values for expenses.
Then, double-entry accounting appeared which records each of a company’s financial transactions twice, as corresponding debits and credits. With double-entry accounting, every entry to a given account requires a corresponding, opposite entry to a different account. The total of all of the different debit and credit entries must balance out. This method tracks not just cash on hand, but also the value of all of a company’s assets and this is why double-entry accounting is the most used one for hundreds of years.
It’s time to grow, right?
Because the Internet revolutionizes everything, now software services can help accountants to track and manage financial data, using automation systems, thus saving time. But this is not the only thing technology did for accounting. It also brought a new type of accounting in todays’ economy, called triple-entry accounting. Triple-entry accounting provides three entries for each transaction: a debit entry, a credit entry and an independent recording entity which provides an additional layer of security and ensures transparency and that all records are tamper-proof.
This can only be done using digital tools.
It does not matter how advanced traditional software systems are in creating a strong database as this third entity, the lack of security and transparency, alongside with the edit option and vulnerability to data tampering, the forge risk will be always there. We need something better, something immutable to store data, a distributed ledger for more security and transparency for transactions.
This is the part where blockchain is getting involved.
Digitalization of accounting
What is blockchain?
Blockchain is a distributed ledger technology.
- TECHNOLOGY- you just need an internet connection in order to access blockchain network
- LEDGER- it stores data
- DISTRIBUTED- it is controlled by the users of the network, without the need of a middleman
What is the role of Blockchain?
- To store data in a digital format without the need of a middleman
How was blockchain created?
- Using cryptography and coding (some lines of code and functions written in an application)
What makes blockchain unique?
- Any information that is stored on the blockchain network can NOT be deleted/modified/changed (it remains forever on the blockchain) --> blockchain is immutable
- Each transaction/action can be seen by everyone --> blockchain is transparent
- Users’ identities are associated with some addresses (pseudonyms) created automatically with random numbers and letters (64 strings) --> blockchain is good for privacy
- It provides ownership over assets/identity using encryption --> in blockchain ‘code is law’
Why is blockchain safe to use?
- Because it relays on computers and math to store data, so blockchain is not subjected to human errors
Blockchain vs Database
BLOCKCHAIN:
- Data is stored chronological in blocks
- Uses cryptography to create the chain of blocks
- Has many administrators (distributed)
- No single point of failure
- Each admin has a copy of the chain and if an error occurs in a block, so the copies does not match anymore, the respective block will automatically be eliminated
- No human errors
- Time saver
- Low cost
- Decentralized
- Immutable
- Transactions appear as long addresses (privacy)
- Anyone can see the transactions (transparent)
DATABASE:
- Data is organized in tables and fields
- Information can be easily found and retrieved
- Has one administrator
- Single point of failure
- Just the admin is in control and if an error occurs, it has to be looked out and found by specialists with computers
- Risk of human errors
- Time consuming
- Costly
- Centralized
- Changeable
- Transactions contain detailed information
- Limited transparency
Accounting and blockchain implications
Blockchain is an accounting technology.
It is a concern the transfer of ownership of assets, and maintaining a ledger of accurate financial information. The accounting profession involves measurement and communication of financial information, and the analysis of said information. Much of the profession is concerned with ascertaining or measuring rights and obligations over property, or planning how to best allocate financial resources. For accountants, using blockchain provides clarity over ownership of assets and existence of obligations, and dramatically improves efficiency.
Bookkeeping and blockchain
Blockchain in accounting reduces the costs of maintaining and reconciling ledgers, and provides absolute certainty over the ownership and history of assets. With blockchain, accountants are concentrated on planning and valuation, rather than recordkeeping. So yes, blockchain is a bookkeeper killer.
This is not bad or sad, because it makes room for accountants to be more strategic thinkers and to manage better financial resources in order to obtain higher profits. Successful accountants will be those that work on assessing the real economic interpretation of blockchain records, marrying the record to economic reality and valuation.
For example, blockchain might make the existence of a debtor certain, but its recoverable value and economic worth are still debateable. And an asset’s ownership might be verifiable by blockchain records, but its condition, location and true worth will still need to be assured.
By eliminating reconciliations and providing certainty over transaction history, blockchain could also allow for increases in the scope of accounting, bringing more areas into consideration that are presently deemed too difficult or unreliable to measure, such as the value of the data that a company holds.
Auditing and blockchain
Blockchain has applications in external audit. Performing confirmations of a company’s financial status would be less necessary if the transactions that underlie the status are visible on blockchains.
Blockchain integration and proper data analytics will help with the transactional level assertions involved in an audit. For example, auditing is not just checking the detail of whom a transaction was between and the monetary amount, but also how it is recorded and classified. If a transaction credits cash, is this outflow due to cost of sales or expenses, or is it paying a creditor, or creating an asset?
These judgemental elements often require context that is not available to the general public, but instead require knowledge of the business, and with blockchain in place, the auditor will have more time to focus on these questions.
Non-Fungible-Token Invoicing
The most revolutionary aspect that blockchain made possible for accounting is Non-Fungible-Token Invoicing. This resolves the problem of fake invoices that are harder and harder to find, by using NFTs to prove the ownership of invoices.
What are NFTs?
In essence NFTs are all about ownership.
Let’s start with the ‘T’, so tokens, that means units of data, stored on a blockchain, created, of course, using cryptography.
Each NFT is unique and the supply of an NFT will always be one.
Each NFT has its own identification code and metadata that can be linked to actual physical objects like a painting, a car, a house, or any digital file on a computer and can have different utilities/benefits.
NFTs role is to provide the owner of the NFT the proof of ownership.
‘NF’ stands for non-fungible that means the NFT is irreplaceable, and you can’t exchange an NFT to other one and expect to have the same value, so NFTs are unique.
The recipient of an invoice is responsible for checking and processing the data. Performing this task accurately involves a lot of verification work, despite the high degree of automation. Using NFT invoicing, invoice senders place an invoice on the blockchain, meaning the sender or recipient cannot change it. Recipients can automatically validate incoming invoices based on their blockchain-based counterpart, the NFT invoice.
NFT invoicing is a blockchain based technology, allowing businesses to create NFTs out of invoices. This means that a digital version of the invoice is encrypted and stored on the blockchain. The NFT invoice serves as an immutable backup of the digital invoice and a single source of truth between two trading parties. This single source of truth enables a higher degree of automation, seamless records and full ownership of your administration.
Adoption of blockchain accounting
Due to the benefits of blockchain, it is just a matter of time until all businesses and individuals will use blockchain technology for accounting activities. Everybody is sending now emails instead of letters. We read the news online, not from newspapers. We use social media to connect with each other. This is the nature of things.
Accounting will improve. Accountant profession will change. Some people will lose their jobs and will be mad, some will understand that this is how the word works. We all want progress and a better life and accounting field wants to grow too. Blockchain is the key for accounting to evolve positively.
Blockchain is for business industry what Internet was for journalism industry.
Resources:
Accounting Explained With Brief History and Modern Job Requirements (investopedia.com)
why use NFT Invoicing? - NFT Invoicing (mintblue.com)
Blockchain and the future of accountancy | ICAEW
‘Token Economy’ Book, Second Edition by Shermin Voshmgir
Disclaimer: This is not financial advice! Informative purpose only!
For more: (17) Elena⚡️ (@CatalinaDidita) / Twitter
