If you are related to the accounting profession, you most likely understand the limitations of traditional methods that were used in accounting practices. You have probably irked at some point in your career about the time it takes to process data. You would have wished for a magic wand that can organize your records in a jiffy, yet enable you to ship your reports in a blaze of glory.
Almost certainly, the mind-numbing toil and square up with the reconciliation processes have left you wanting more time at hand – the time that you would rather spend strategizing processes and making decisions to add real value to the business.
Blockchain in Accounting
Components in the accounting cycle have come a long way from being traditional systems to manifesting their utility in sophisticated computer software. Transaction records, also called ledgers, are an essential entity in the accounting cycle that has evolved slowly from paper-based systems in the past to a digital collection of transactional data.
Advancement in technology focussed on speed, efficiency, and security. Digital ledgers that resided in centralized general ledgers in the database of an accounting software transformed into decentralized, distributed digital ledgers. And then, blockchain arrived.
Blockchain in accounting comprises a sophisticated system of bookkeeping that implements distributed ledger systems.
Application of Blockchain in Accounting
In accounting practices, the storage of data on internal servers as well as clouds has its challenges. The systems are often expensive and complex to maintain. Sending critical financial data to stakeholders may lead to loss of data. Manual tasks are a massive drain on time and resources and involve activities such as manually entering data in a system at the source, downloading data by a client, and uploading it again into a software.
This is time-consuming and error-prone. Lack of interoperability of diverse systems at the source and destination also causes a significant setback. Organizations take a long time to come to speed with the change in the business environment.
This is where the application of blockchain in accounting has turned the tide for the industry. Blockchain ensures the quality of data is right at the point of data entry. A network of online businesses exchange records of digital transactions. Data that is part of such documents are signed with cryptographic hashes. Hashes are mathematical functions that help in identifying data uniquely.
For example, when you make an online transaction, the transaction details, such as the date, time, quantity, and the amount of transaction, are stored in blocks of data. Instead of recording your actual identity, data can be tagged with a unique digital signature.
Data is kept as secure blocks of information where each block stores the hash of a connection block. All of these blocks are tied cryptographically in the form of chains and build entries in a ledger. Cryptographic hashes ensure data integrity.
Once created, multiple copies of the ledger are distributed over a peer-to-peer network and are stored in various devices that belong to stakeholders in the network. Distribution ensures that trusted, secure data is shared on public networks. Any change henceforth would require the relevant systems, also called nodes, in the network to conform to the change, only if all of the users agree.
The process of allowing new blocks in the chain only after all users, also called miners in the network, agree is referred to as consensus. Each change is propagated immediately over the network, which entails that each participant has control over the ledger in contrast with a single master copy entrusted to a centralized system.
Using blockchain in accounting means following a triple accounting method that maintains three ledgers – by the buyer, by the seller, and a publicly available set of secure records. The public set provides undeniable evidence of the existing transactions.
In the absence of a centralized system, records are available in many places. As a result, it is not possible to delete them without consensus. This ensures that owners are completely in control of their data as much as it becomes highly complex to manipulate data that is available digitally. Distribution, along with the application of cryptographic hashes, provides impeccable security. It is this combination of these characteristics that makes blockchains immutable.
Closing the books of account is slated to be an instant process using blockchain in the accounting process. Generally, the process takes a few weeks to a few months. The preparation of financial statements takes a couple of months. With real-time processing, these delays are going to be a thing of the past.
Smart contracts are going to change the accounting scenario completely. Smart contracts are programmable triggers that cause changes in a normal financial transaction when certain conditions are met.
All of the above-mentioned benefits cause auditing to be a smooth process. The integrity of records and traceable trails of changes made in a standardized manner makes it easy for auditors to verify records automatically. Because of consensus, there is almost no need for verification and auditing.
The use of blockchain technology will lead to a massive change in the way accounting professionals look at their jobs. They will no longer be buried under piles of data, performing number-crunching exercises. The application of blockchain will free-up time and resources so accounting firms can change their practices for the better.
Professionals can now establish reports and understand the impact of data to drive businesses towards profitability and increase margins. They can participate in creating forecasting models and provide value by participating in critical business-driving discussion.
Blockchain is going to create a revolution. It is not going to take your jobs away as you may have feared but will lead you to a career path of your dreams. It is necessary, however, to upskill yourself and acquaint yourself well with how the technology works.
upGrad offers courses in blockchain that you can choose depending on your career journey and the path you want to follow. If you want to learn more and know the basics of the technology, these insights from some useful articles can help you take the plunge
If you’re interested to become a blockchain developer and build smart contracts and chaincodes, checkout IIIT-B & upGrad’s PG Certification in Blockchain Technology.