How Can Blockchain be Used in Accounting?

The accounting field has progressed significantly over the past. The introduction of standardized bodies and procedures has helped this field go global. On top of that, using technology in this area has also enhanced its reach greatly. Digital technology has played a vital role in helping the field progress even further. It contributed to more stability and made the process faster.

However, technology has also introduced some issues and worries among the professionals in the field. One such area includes blockchain. Blockchain technology isn’t something new to the world. However, many experts believe it has had a significant impact on accounting. Compared to the field itself, blockchain is a relatively new technology. Despite that, the latter has become one of the most prominent talking points worldwide.

Blockchain can also help accountants in different ways. It can potentially impact all areas within the field. For example, they may include bookkeeping, accounting, auditing, etc. Many companies are also welcoming this technology into their finance departments. Therefore, blockchain can have many uses in accounting. Before discussing those uses, it is crucial to understand what blockchain is.

What is the meaning of Blockchain?

Blockchain is a technology that powers billions of transactions worldwide. As the name suggests, it uses a system of forming blocks that it links through a chain. Most people associate blockchain with Bitcoin or other cryptocurrencies. However, it is much more than that. Essentially, blockchain encompasses a significant amount of information. This information relates to records, also known as blocks.

Blockchain uses blocks to store data and links it together using chains. In technical terms, these chains get formed through the use of cryptography. Blockchain uses this system to store data about the previous block, the transaction and a timestamp. Since each block includes information about its preceding block, it forms a chain that connects them. On top of that, the transaction date serves to prove the existence of the transaction.

Blockchains cannot change or get modified. Once the data gets recorded, it becomes a part of a chain. Changing that data can cause the chain to break and disrupt the whole system. Any alterations to one block can also alter all subsequent blocks falling within that chain. Although some may view it as a problem, it is a feature that makes blockchain highly trustable.

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Blockchain technology can be managed through a P2P network. It can use this technology as a publicly distributed ledger. However, the underlying technology is secure by design despite being part of various networks. It is one of the features that make blockchain technology so valuable worldwide. It is also one of the primary objectives of this technology. It allows recording and distributing data but not altering it.

Blockchain technology is very similar to the accounting systems used in modern businesses. Essentially, it includes a list of various transactions within a group or network. Every member within that network has a copy of the information about those transactions. However, t has a unique identity, which is its hash. These features can help in various areas of accounting.

How can Blockchain be used in Accounting?

Many experts believe that blockchain can significantly impact the accounting field. Some signs suggest that the accounting profession is welcoming this technology. Essentially, it can have a similar impact as digital systems initially. However, it is still not evident how blockchain can impact the accounting profession.

Historically, the accounting field has used a double-entry system for bookkeeping. This system has some limitations. Nonetheless, it offers a highly stable method to record and account for transactions. It also provides the basis for modern financial statements and reports. However, blockchain technology goes beyond that system. It has the potential to convert it into a tripe-entry accounting system.

In double-entry accounting, companies use a debit and credit side to transactions. It involves using the same amount on both sides with the corresponding accounts and other details. However, the triple-entry accounting system requires an additional step. In this case, the third entry goes on the blockchain. The primary principles of double-entry will still hold. However, it will involve an additional step.

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The above encompasses the primary way that companies can use blockchain in accounting. This usage can impact them in various ways and areas. One of those areas includes smart contracts. Essentially, the term refers to a computer protocol that requires blockchain technology to run. These contracts can hold funds and release them once a specific set of rules has been met. This system can have a significant impact on the accounting profession.

Blockchain technology also comes with decentralized ledger technology. Essentially, it removes any intermediaries from the process when transferring money. This system allows blockchain technology to be decentralized rather than relying on those parties. Consequently, it provides better proof of the occurrence of various transactions. Therefore, it can create better supporting evidence for several transactions.

How can Blockchain be used in Auditing?

Besides accounting, blockchain technology can also impact the auditing field. Essentially, auditors confirm transactions and balances from the financial statements. However, they use client ledgers and accounting records to achieve that. Blockchain’s impact on accounting also translates to the work that auditors perform.

Essentially, blockchain provides an immutable record of transactions. This record allows clients to share transaction information with auditors. On top of that, it can remove transaction-level reconciliations. Consequently, it aids the auditing process and makes it continuous. It implies that the auditing process can go from an annual or quarterly process to an ongoing one.

Blockchain also allows auditors to obtain information in real-time. Due to various limitations, it may not be possible in traditional audits. However, blockchain technology changes that by helping companies record and settle transactions as they occur. This process is more consistent than the traditional accounting systems used within companies. For auditors, it provides access to data quicker than those systems.

Auditors can then use the data obtained in their audit procedures. They can analyze and test the transactions as they occur. On top of that, it also allows for a real-time reconciliation. On top of that, it provides them better access to the information on the client’s systems. Essentially, blockchain removes the need to enter accounting information into various databases. This way, it can eliminate the need to reconcile items.

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However, blockchain cannot replace the traditional auditing process completely. Some limitations will still exist that can limit the benefits obtained from it. Some areas within audits require professional expertise and experience. On top of that, auditors must use professional scepticism despite the facilities available. These limitations can impact how effective blockchain is in enhancing the audit process.

What are the challenges of applying Blockchain in Accounting?

Blockchain is still in its early stages relative to the accounting field. On top of that, it is yet to find its way into accounting. Therefore, some challenges still exist in applying blockchain in accounting. Some of those include the following.

  • Blockchain is relatively new and is at its experimental stage.
  • Companies will need to establish the roles and responsibilities of the personnel involved.
  • Data security can become an issue when dealing with a significant amount of critical information online.
  • Companies will need more computing capacity to support using blockchain within accounting.
  • Accounting standards and other regulations do not provide any guidance in this area.
  • Blockchain technology requires significant resources in implantation.
  • Companies must train professionals as blockchain requires specific knowledge and expertise.

Apart from these, other limitations to implementing blockchain in accounting may also exist. The above does not constitute an exhaustive list of the challenges.

Conclusion

Blockchain has become a valuable resource on the internet. Primarily, this technology stores information in blocks and connects it in chains. Blockchain can have a significant impact on the fields of accounting and auditing. Essentially, it can transform the whole process involved within those areas. However, some challenges still exist to its implementation in those fields.