When most people think about blockchain, cryptocurrencies like Bitcoin come to mind. But authenticating virtual currency is only one of the applications of blockchain. There’s so much more to this innovative and disruptive technology. And as any untrained eye can see, blockchain is disrupting and changing the accounting industry in some profoundly positive ways.
The Fundamentals: What is Blockchain?
You’ve heard the term over and over again, but what exactly is the blockchain? And why does it matter?
According to expert Ameer Rosic, “A blockchain is, in the simplest of terms, a time-stamped series of immutable record of data that is managed by cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) are secured and bound to each other using cryptographic principles (i.e. chain).”
The beauty of the blockchain network is that it’s totally and emphatically democratized. It’s a shared, immutable ledger that anyone and everyone can see. This allows for peak transparency – something that’s paramount in financial records and decision making. It’s also incredibly secure.
“One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net,” Rosic notes. “The verified block is added to a chain, which is stored across the net, creating not just a unique record, but a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances. That is virtually impossible.”
Another key benefit of the blockchain is that it’s free. Unlike other transactional methods that take a fee – like wiring money or processing a loan – the blockchain removes cost from the equation. This paves the way for small and large transactions alike. (For example, someone could theoretically charge 1/100 of a cent for something and record the transaction.)
To summarize, blockchain is accessible, secure, and free. In other words, it’s the best of all worlds. And while it doesn’t get as much press as authenticating virtual currency, blockchain is changing the accounting industry in some pretty big ways.
3 Blockchain Applications in Accounting
Blockchain has as much potential, if not more, than the internet and the cloud. It’s that flexible and powerful. And while some industries have been slow to adapt, the accounting space has been surprisingly swift in its adoption of distributed ledger technology. There’s also reason to believe that there will be an abundance of continued innovation in the years to come.
Let’s explore some of the specific changes we’re seeing, as well as the trends we expect to see in the near future.
1. Simpler and More Accurate Audits
Blockchain has immense potential in the auditing of businesses – particularly external audits.
When combined with the right data analytics platform, a progressive blockchain solution can help provide auditors with a transactional level view of the company’s undertakings. This frees up the auditor to focus on higher level issues.
With blockchain, an auditor can quickly and seamlessly check the details of whom a transaction was between, the monetary amount, and how it was recorded and classified. And because of the immutable and transparent nature of blockchain ledgers, there’s almost zero risk of error or misinterpretation. All audits are accurate and truthful, which lowers the chances of delays and prevents the need for time-consuming manual reviews.
2. Smart Contracts
From a business accounting perspective, one of the biggest stress points involves the waiting period between assigning a contract and financially executing upon it. The delay, which can sometimes be weeks or months, throws everything off and leads to a feeling of disorganization. Enter blockchain, which paves the way for smart contracts.
“Smart contracts are blocks of code written to automate certain processes, and represent one of the most exciting features of [distributed ledger technology],” blockchain expert Rick Martin writes. “A simple application in accounting could be the automatic payout of vacation earnings upon termination of an employee on a client’s payroll.”
Smart contracts allow for the automated execution of a variety of tasks based on certain conditions being met. In other words, blockchain is about more than just storing and recording data – it can also be used as part of process-based solutions.
3. Traceable Assets
Think about how much time and energy goes into simply organizing and delineating ownership of assets – such as stocks, bonds, mutual funds, deeds, titles, and inventory. Businesses regularly expend thousands of man-hours each year on simply tracing assets. With blockchain this is no longer necessary.
As mentioned, blockchain ledgers are unchangeable. Thus, as soon as an asset is recorded, an undisputed, fully transparent copy instantly becomes accessible to everyone. There’s no need to protect it or worry about asset theft. This puts everyone’s minds at ease.
The Benefits of Blockchain in Accounting
Now that we’ve explored some of the specific applications of blockchain, let’s take a look at some of the direct benefits the accounting industry will enjoy.
- Greater efficiency.
- Think about all of the time it takes to organize, reconcile, and verify accounting ledgers and transactions. Now consider how much time could be saved with powerful blockchain technology that streamlines the input and recording of important financial data. We’re talking about hundreds of thousands of hours every year.
- Fewer Errors.
- Perhaps the greatest benefit of blockchain – at least from an accounting perspective – is the elimination of errors. This is particularly true when you look at errors that occur after data is entered the first time. It’s impossible to manipulate data, which significantly reduces the likelihood of human error.
- Lower costs.
- When you improve efficiency and reduce errors, it’s easy to see how this translates into lower costs. While there’s certainly an initial expense to align processes and systems with blockchain technology, rapid cost savings will be enjoyed for many years to come.
- Less fraud.
- Immutable, unchangeable, concrete – whatever word you want to use, the blockchain makes fraud virtually impossible. This strengthens the integrity of accounting and allows businesses and accountants to focus on the things that truly matter.
- Better compliance.
- Regulatory compliance is a big deal. For larger organizations, in particular, it can take a team of full-time accountants and professionals to ensure the business is constantly meeting all industry requirements. With blockchain, this burden is greatly reduced and simplified. In the coming years, we may see a world where distributed ledger technology is mandatory in certain financial and legal sectors.
Blockchain shouldn’t be viewed as a threat. Instead, it’s best if we look at it as an opportunity. While things are certainly evolving, they’re changing for the better. The accountants, firms, and business leaders that adapt with the times will be able to tap into the aforementioned benefits. The ones that fight upstream will experience tremendous friction.
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As blockchain continues to democratize the world of accounting, we’re seeing a greater shift to the online world. At Taxfyle, we’re one of the leaders in this movement.
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Contact us today to see why some of the world’s best companies rely on Taxfyle to get ahead of the game. We’ll be happy to show you what the future of accounting looks like in practice!