Triple entry accounting: Blockchain tech may shape future systems

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Towards a technology backed triple entry accounting system: Blockchain and other disruptive technologies have already begun to mark their presence in every sector, and accounting is not an exception. If one traces back the origin of accounting practices, it can be seen that they have been evolving for the last 5000 years. The latest in the evolution could a triple entry accounting system that could deliver real-time insights to business operations.

Single entry accounting (SEA) is the simplest form of accounting that is easy to maintain, but it lacks transparency and accountability. Single entry accounting does not include parameters such as accounts receivable, accounts payable and inventory. The result is that one cannot generate a balance sheet or income statement of an organisation.

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The second major drawback of the single-entry system is that it fails to track liabilities and assets of an organisation. All these issues are fixed in double entry accounting (DEA). Due to the above reasons, cash-based accounting is preferred over accrual-based accounting.

Does this mean single entry-based accounting is incorrect or not in use? No, single entry accounting still exists, but it is limited to smaller entities with low volume of activity. Over the last few decades, DEA standardisation is being gradually strengthened. However, insolvency of several organisations in the last few decades due to a chain of accounting malpractices raises questions against the double entry accounting system.

On October 20 2019, the Financial Times published an article, PwC accused of conflict over dual role at Thomas Cook. One of the biggest tourism companies in the world is facing bankruptcy due to years of accounting malpractices. Another classic example is the Satyam Computer insolvency case due to a series of accounting malpractices over the years. Then other well-known cases such as Enron and WorldCom raise a million-dollar question: Could technological applications have saved these organisations from accounting frauds?

Although double entry accounting appears to be superior to single entry accounting, it has several flaws. Experts and researchers point out two major drawbacks associated with the double entry accounting system as mentioned here. First, the finance department of any organisation has the full control over the accounting data until it is audited. This creates difficulties for the audit. Second, even though organisations are using several sophisticated software, the system is not capable of delivering real-time insights.

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Towards a triple entry accounting system

These shortcomings are very significant as business entities are interested in maintaining high level transparency and need information in real time. Due to these downsides of the double entry accounting systems, business entities are already thinking about alternatives to the current accounting practices such as triple entry accounting (TEA).

Triple entry accounting has good prospects as evident from the significant number of publications on this topic in recent years. Accounting professionals are known for quickly adopting new technologies. For successful adaptation of the triple entry accounting framework by organisations, it is important that they choose relevant accounting technologies as per their requirement. Consequently, accounting professionals must be well trained and skilled in those technologies to deal with practical issues.

For successful implementation of the blockchain-based triple entry accounting system, one needs to build a sustainable blockchain ecosystem backed by appropriate governance mechanisms. Using the blockchain does not automatically mean that the transactions will be recorded in real time. Hence, blockchain technology is not enough to implement a triple entry accounting system that meets the real time requirements of an organisation as highlighted by Maiti (2021).

There is a need for iterative strategic implementation of the overall technological framework that could initiate the actual implementation of triple entry accounting at the global level. Blockchain probably will transform the way of doing accounting transactions. But it is the tip of the iceberg as much is yet to be discovered and understood. It will be interesting to see whether triple entry accounting will achieve consensus to end the ongoing accounting debates.

(Dr Moinak Maiti is Associate Professor, Department of Finance, National Research University, Saint Petersburg, Russia.)