What is Blockchain in Accounting?

You’ve probably heard about blockchain’s role in cryptocurrency, but its applications go far beyond digital coins. Blockchain allows for secure and transparent transactions involving property rights, contracts, and financial obligations. When paired with artificial intelligence (AI), distributed ledger technology can significantly reduce the time financial professionals spend on manual data entry and fraud prevention. In this blog post, we’ll explore how blockchain in accounting is transforming the industry and the key challenges accountants face when adopting it.

What is Blockchain Technology?

Blockchain is an immutable registry that ensures transparent operations in a peer-to-peer system. It displays, controls, and stores information with decentralized tools to eliminate intermediaries such as banks and other financial institutions from the process. Any operation is recorded and displayed in the distributed register. Blocks are encrypted and combined to create a correct chronology. Information stored in a decentralized registry cannot be deleted or changed.

If the technology had initially been applied beyond just transferring crypto coins between wallets, blockchain in accounting might have gained popularity sooner. It prevents fraudulent operations, optimizes the supply chain, and improves other business operations.

How Blockchain Impacts Accounting

To understand the impact of blockchain in accounting, we need to return to the foundation — the general ledger (GL). The GL records all assets, liabilities, income, and expenses, serving as the central source of financial data. Traditional accounting relies on the double-entry system, where each transaction includes equal debit and credit entries to ensure accuracy. In blockchain-based accounting, a concept known as a triple-entry accounting system introduces a third component: a secure and unchangeable entry maintained across a distributed network. This third entry adds transparency and trust to financial operations. Now, let’s explore the key aspects of blockchain accounting.

• Real-time auditing. Decentralized register revolutionizes auditing by allowing money flows to be monitored in real time. It is transparent and immutable, so auditors may access actual databases, decreasing the time and effort spent controlling financial information. It provides continuous and efficient blockchain audit and cuts the risk of inaccuracies and fraud.
• Decentralization and distributed nature of the registry. The most essential feature of the decentralized register is the exclusion of intermediaries in financial operations. A client can send cash through a peer-to-peer (P2P) system without the participation of a bank or other financial establishments. Blockchain guarantees security with public witnesses, i.e., miners. They replace the central institution in controlling operations.
• Asset tokenization. Tokenization involves exchanging real and intangible assets into tokens on the blockchain, raising liquidity and implementing fractional ownership. This procedure expands financing options by allowing small investors to buy parts of assets, including art, real estate, and goods.
• Smart contracts and automated transactions. Blockchain simplifies modern accounting tasks. With smart contracts, operations are executed automatically when selected conditions occur. This allows firms to automate certain activities, including payroll and reconciliation. It decreases administrative expenditures and eliminates human inaccuracies.

Although a decentralized register has been around for decades, its use in cloud-based accounting is still in its early stages.

Benefits of Blockchain for Accounting

Today, the number of firms that want to implement blockchain in accounting constantly increases. This is due to the many profits that the digital registry offers. Let’s consider what competitive advantages a business receives.

• Reducing fraud and errors. In standard accounting systems, information is stored in centralized locations, while blockchain distributes it across different nodes, ensuring that no single participant gains control of the full dataset. Operations are verified with consensus mechanisms and cannot be changed once recorded. The decentralized solution implements cryptographic tools to protect information and cut the risk of fraud.
• Improving transparency and trust. Blockchain increases transparency by creating an immutable ledger in which all operations are time-stamped. Since all information is available, firms control the history of any operation at any time and suggest a level of transparency that is impossible to achieve with standard algorithms. It is vital for regulated sectors where it is necessary to gain the trust of partners and customers.
• Streamlining financial reporting. Firms with traditional recordings may adjust their books only at the end of the period. At the same time, the decentralized register records any money movement instantly, ensuring all participants access to actual datasets at any minute. This allows firms to make rational decisions.

It is essential to seek professional help to adopt this technology into your firm’s operations.

Challenges and Considerations

The complex structure that powers a decentralized system can create some troubles. Let’s analyze the primary downsides of blockchain in accounting that should be considered.

• Synchronization with other software. Adding a distributed ledger to financial operations requires considerable changes to actual financial applications and enterprise resource planning (ERP). Such a transition may be complicated and require much time and energy to ensure a full synchronization with legacy solutions.
• Education and adoption barriers. Since the technology is complex, any accountant or bookkeeper must acquire specialized skills to use it effectively. Shortly, financial professionals may see their skills shift towards AI-based technologies.
• Regulatory compliance issues. Most governments and authorized agencies are creating cryptocurrency accounting rules. Due to the uncertainty of future laws, firms may face compliance issues and risks.

Blockchain accounting startups may require considerable changes in how specialists think and do their jobs. It may seem insurmountable, as some experts may be more resistant to innovative technologies than others.

Practical Applications of Blockchain in Accounting

Let’s analyze the most promising options for utilizing blockchain in accounting.

• Supply chain and inventory reconciliation. The technology changes the supply chain, providing instant tracking of operations and blockchain payments. Such transparency decreases fraud and increases efficiency. So, IBM’s distributed ledger controls the path of food products from farm to delivery, ensuring their safety. Such systems improve trust between counterparties and financial operations.
• Payment and invoicing systems. Blockchain changes payment systems, allowing for fast, cheap, and secure operations. Cryptocurrency and stablecoins are increasingly becoming alternatives to standard banking services. Ripple and Stellar portals offer operations worldwide with small fees and delays, benefiting businesses and individuals.
• Central bank digital currencies (CBDC). Central banks are considering issuing crypto coins on the blockchain, known as CBDC. They aim to improve the current monetary system and expand financial inclusion. CBCD suggests a secure and efficient alternative to standard banknotes to enable seamless digital payments and implement relevant fiscal and monetary policies.

As blockchain technology in accounting evolves, the list of scenarios for using the decentralized system expands.

Tips and Reminders

Users planning to add blockchain in accounting should follow some recommendations to experience the full benefits of decentralized record keeping.

• Stay updated on regulations. You may want to work with a legal advisor on tax laws and document requirements for blockchain operations. Make sure yours complies with industry standards and data protection laws.
• Start small with pilot projects. Many cycles can be carried out in parallel for different blockchain applications, with innovators aiming to implement limited pilot projects to explore various use cases in financial sectors. Many business owners are pleased that the procedure stage does not require significant changes to the business, allowing accountants to continue their activities without lengthy interruptions.

The phased implementation of the decentralized registry allows users to experience the system’s benefits quickly and without additional complications.

Final Words

As we’ve seen, early adoption of blockchain in accounting is essential for any firm that wants to remain competitive and profitable in the industry.

However, implementing such technology requires a solid foundation of knowledge and skills, not to mention establishing connections with other experts who have experience using the technology. BooksTime’s goal is to support business owners who want to expand their technology stack.

If you want to learn more about how blockchain and other innovative technologies can improve your business, we recommend consulting with BooksTime experts. We can help you assess your current processes, identify opportunities for improvement, and guide you through every step of integration. With the right support, embracing blockchain in accounting becomes a strategic advantage.