Wondering how Blockchain can revolutionize accounting? You have landed on the right page. This article will talk about Blockchain technology, technologies that make Blockchain possible, and how it can impact the accounting domain.
So let’s get started with what this technology is all about.
Table of Contents
- What is Blockchain?
- Technologies That Make Blockchain Possible
- Blockchain in Accounting Domain
- The Verdict
What is Blockchain?
Blockchain is a Peer-to-Peer(P2P) distributed shared ledger that has characteristics of decentralization, immutability, transparency, security, and privacy. Technology is capable of storing data securely that has useful characteristics, especially for accounting data.
Rather than acknowledging Blockchain as technology, few assume that it is a tool that has the potential to drive massive economic development. It provides a platform where information can be secured without involving any third-party intermediary. Moreover, it also offers an innovative way to record and share data; thus, it can be applied to any sector of the economy, including accounting and auditing.
Due to advancements in technology, accounting systems are now pushed from the physical world to the digital one, and Blockchain experts and technocrats believe that this technology will play a crucial role in that transition.
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Technologies That Make Blockchain Possible
Before understanding the implications of Blockchain in accountancy, let’s have a quick look at technologies that make this technology possible.
In the P2P network, each participant acts as an individual peer, has equal power, and performs the same tasks. In P2P, there is no central authority, and all nodes maintain a copy of the entire ledger every time. This makes it different from the traditional client-server models.
Public Key Infrastructure(PKI)
For building trust between the participating parties, Blockchain makes use of cryptography. It uses asymmetric encryption to identify parties through digital signatures, along with the integrity of the transactions. With PKI, a pair of public and private keys is generated.
Blockchain utilizes hash functions that are used throughout the entire process. Such functions ensure that records are not tempered, guaranteeing the integrity of the whole system.
Blockchain in Accounting Domain
Since Blockchain is capable of recording and storing digital assets in a most secure way, and provides methods of recording cash flows and settling accounts, it is assumed to be a technology that fits perfectly well for accounting purposes. Technology helps in a way that it ensures that all data based on accounting is kept in an immutable and transparent manner on a blockchain network. Moreover, it allows accountants and CPAs to streamline their auditing processes while ensuring that the records are authentic and honest. This makes it different from traditional accounting systems that are prone to fraudulent practices due to human intervention.
Due to this, many powerful companies, technology experts, and end-users, including international accounting firms, have come up and invested in Blockchain. Let’s explore a few more implications.
Blockchain is known for its security and transparency. It helps in reducing scams and hoax because, in order to make changes in a record, the attacker/modifier has to make changes in all those blocks from where the ledger transaction originated initially.
Benefits of Reconciliation
With Blockchain, reconciliation( an accounting process) validates that accounts in the shared ledger are consistent and accurate. Smart contract functionalities can lessen accounting pressure and thus prove to be helpful for accountants.
Enhanced Efficiency and Improved Cost Benefits
Compared to common accounting processes, Blockchain helps in reducing tiresome efforts that are involved in recording and authenticating data, and along with reduced errors, it proves to be beneficial in reducing the cost of performing the same.
Accounting is the vehicle for reporting financial information about any organization or business. Incorporating Blockchain in accounting can lead to efficient operations and re-evaluate business models. When it comes to accountancy, it has its use-cases across various domains, including supply chain management, healthcare, automobile, manufacturing, among others. But the most notable issue that persists is the scalability of the Blockchain and whether the scaling cost of Blockchain would be low enough compared to the benefits of adoption.
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Potential Benefits of Blockchain Technology in Accountancy