Blockchain can be described in many ways, but at its core, it’s an accounting technology
Accounting is best described as the process of recording financial information about economic entities, from individuals to businesses.
That’s what Blockchain does — it records and verifies the exchange of value between people, time-stamping and permanently storing transaction details. The whole process is automated and extremely accurate.
We’ve looked at the evolution of money, but what about the surrounding systems?
Money doesn’t exist in a vacuum.
To exchange value with other people, we need trust. For businesses to flourish, we need to know the ins and outs of their financial situations.
Accounting first emerged as far back as 7000 years ago to solve those problems, before humans had even invented what we think of as money, writing, or abstract numbers. Indeed, some historians believe that the need to track the exchange of value between people led to the development of those three innovations that are arguably humanity’s greatest inventions.
Simple marks used in record keeping led to the first cuneiform script. The desire to make calculations led to abstract numbers.
New record-keeping methods evolved to meet new needs, as trade spread further, taxation funded governments, and individuals grew wealthier.
Double entry bookkeeping
Today, the traditional financial industry uses a continuation of the double entry accounting system first formally described in the 15th century by Luca Pacioli. While Pacioli didn’t invent it, he codified the principles we still use.
This system uses 2 entries for each transfer of value — one debiting an account on the left side and one crediting an account on the right side. It tells you what you’ve received and where it came from.
For example, if a business was to spend 10,000 USD of credit on new equipment, that would add to its inventory account and add to its liabilities account. Without a corresponding credit for each debit, you can’t make an entry.
As simple as this sounds, double entry bookkeeping proved revolutionary.
Following the publication of Pacioli’s work, merchants had a trustworthy way of measuring the worth of their businesses and it soon spread.
But what about those outside a business, how could they know the records were true? Hence the need for independent auditors, our current means of preventing accounting fraud. Businesses have to complete extensive documentation and audits to prove the accuracy of their financial statements.
While many areas of our lives, from media to communication, have moved into the digital realm, accounting has yet to fully catch-up.
This comes down to the strict regulatory controls, which make it difficult for innovative new technology to gain a foothold.
But many people believe Blockchain has major applications for the industry because it removes the need to trust a centralised authority.
Now that we live in an interconnected world where we’re constantly interacting with people all over the globe, trust is a pertinent issue. Provided you believe in the integrity of the technology, Blockchain can let us bypass the need for a centralised authority to trust.
The benefits of Blockchain for accounting
Blockchain already serves as a ledger for cryptocurrencies, and could potentially have wider applications. Although we don’t know if it will work yet as a separate technology, the benefits are compelling.
For a start, it vastly reduces the risk of simple human error. No one is perfect and even the best accountants can sometimes make costly mistakes. With a peer-to-peer network, all participants need to verify each transaction.
Blockchain is automated, so blunders are far less likely. With automation comes increased speed and lower costs. Blockchain is far more efficient than manual systems, quickly updating records without using up an accountant’s time. It can also be public, creating greater transparency and accountability.
Once records on a Blockchain are verified and recorded, it’s almost impossible to tamper with them. Despite the best efforts of the accounting profession, fraud and other financial crimes are still prevalent.
All this information is useless to us unless we are able to put it towards something that can actually make our lives better — what else is technology for?
Let us know how you see this technology evolving and possibly revolutionising in your field.