Triple entry accounting system: A revolution with blockchain by Kapil RANA DataSeries

To decrease a liability or equity, you debit the account, that is, you enter the amount on the left side of the account. In the double-entry system, transactions are recorded in terms of debits and credits. Standard types of accounts include assets, liabilities, equity, revenue and expenses. In a double-entry accounting system, a corporate bookkeeper records every transaction through two accounts, depending on the underlying economic event — the other name for a transaction.

Concepts

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. It’s an interesting concept, given that it would be a significant departure from double-entry accounting, which the world of business has relied on for hundreds of years. The very existence of accounting, including the measurement, processing, auditing and communicating of financial information about economic entities, is ultimately for the purpose of ensuring trust and transparency. Although current accounting and auditing procedures are time-consuming and expensive, in many cases, they are ineffective. Triple-entry accounting with blockchain is a new and potentially much more efficient way to achieve trust and transparency and is therefore likely to disrupt the accounting industry. Building on blockchain architecture, triple-entry accounting with smart contracts may resolve the fundamental trust and transparency issues that plague current accounting systems.

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• The cryptographicinvention of the digital signature gives powerfulevidentiary force to the receipt, and in practicereduces the accounting problem to one of thereceipt’s presence or its absence.
• In this transaction, the services have been fully rendered (meaning, we made an income; we just haven’t collected it yet.) Hence, we record an increase in income and an increase in a receivable account.
• Every time the blockchain is updated with a new record, both parties to the transaction are able to immediately see the update.
• Ken Boyd is a co-founder of AccountingEd.com and owns St. Louis Test Preparation (AccountingAccidentally.com).

This method enhances the transparency and integrity of financial data by creating a verifiable and immutable record of transactions, often leveraging blockchain technology. The introduction of a third entry allows for more accurate tracking of assets and liabilities, reducing the risk of fraud and errors in financial reporting. Although they showed how tostrongly verify each transaction, they stoppedshort of placing the the digital signature in anoverall framework of accountancy and governance.A needed step was to add in the redundancy impliedin double entry bookkeeping in order to protectboth the transacting agents and thesystem operators from fraud.

The Signed Receipt as a Bookkeeping system

Double Entry bookkeeping arose in concert with thearisal of modern forms of enterprise as pioneeredby the Venetian merchants. Historians have debated whetherDouble Entry was invented to support the dramaticallyexpanded demands of the newer ventures then taking placesurrounding the expansion of city states such as Veniceor whether Double Entry was an enabler of this expansion. Very simple, but it was a method thatwas fraught with the potential for errors.Worse, the errors could be eitheraccidental, and difficult to track down andrepair, or they could be fraudulent.As each entry or each list stood alone,there was nothing to stop a bad employee fromsimply adding more to the list; even whendiscovered there was nothing to say whether itwas an honest mistake, or a fraud.

Journal entries: More examples

Thus, assets are decreased and immediately increased resulting in a net effect of zero. As you can see from the equation, assets always have to equal liabilities plus equity. The digitally signed receipt, with the entireauthorisation for a transaction, representsa dramatic challenge to double entry bookkeepingat least at the conceptual level.

There is a large body of science and literaturebuilt around these patterns of transactions.These have been adopted by the Business Processworkgroup of ebXML and other standards bodies,where they are called “Commercial Transactions.”Where however the present work distinguishes itselfis in breaking down these transactions into theatomic elements. Bookkeeping or accounting has its roots in ancient civilizations, some as old as 5000 years ago and therefore, we have evidence of Single-Entry Accounting even during the Mesopotamian era. However, it can dramatically reduce internal fraud and enhance a company’s operational efficiency.

Identity management is also critical for ensuring that only authorized users can access the blockchain network. And cryptography is necessary to provide security and integrity to the data stored on the blockchain. PWC coined Blockchain as “A Blockchain is ‘another database for recording transactions – one that is copied to all of the computers in a participating network”. As an alternative to transaction fraud, Ian Grigg proposed the idea that a digitally signed receipt backed up by a financial cryptograph between two parties can be viewed by a third entry. We’ve gone through 15 journal entry examples and explained how each are prepared to help you learn the art of recording. Feel free to refer back to the examples above should you encounter similar transactions.

Accounts payable would now have a credit balance of $1,000 ($1,500 initial credit in transaction #5 less $500 debit in the above transaction). In this transaction, the services have been fully rendered (meaning, we made an income; we just haven’t collected it yet.) Hence, we record an increase in income and an increase in a receivable account. Entry Signing.In order to neutralise the threats to and by theparties, a mechanism that freezes and confirmsthe basic data is needed.This is signing, and we require that all entriesare capable of carrying digital triple journal entry signatures(see 1, above, which suggests public key signatures). They come in patterns.For example offers and acceptances form a widertransaction but seldom encapsulate the entirefulfillment and payment cycle.Even if there has been a paymentaccompanying a PO message,the customer then waits for fulfillment. Imagine a simple invoicing procedure.Alice creates an invoice and posts it to her software (GLT).As she has named Bob,the GLT automatically posts it to Ivan,the STR, and he forwards it to Bob.At this point Bob has a decision to make, accept orreject.