Tuesday, January 30, 2018

Blockchain Ledgers are not Accounting Ledgers

There is some confusion in accounting circles about the use of blockchain in financial systems and particularly for financial reporting. While there is a role for blockchain, it is destined to be a defined and somewhat limited role. The reason for this confusion is that all the literature about blockchain refers to its central mechanism for recording transactions as a distributed ledger, which accountants think means that blockchain can somehow substitute for accounting ledgers. It's true, there are applications emerging where blockchains serve a lot of the functions of specific ledgers, such as those used for recording certain contracts or sales ledgers and other specific transaction types,  and these are very useful but they serve a different purpose than accounting ledgers. One of the difficulties lies in the fact that a central purposes of accounting ledgers is to record the transactions using accepted accounting principles. In a blockchain, it's unlikely that all participants in the blockchain are going to agree on accounting principles all the time.

This point is made in a an FEI article recently published. Some further research into the use of blockchains in the accounting cycle is being carried out by "The Financial Executives Research Foundation (FERF) in collaboration with Deloitte to explore how blockchain is currently being adopted in the financial reporting community, the potential for industry disruption and the realistic next steps for the technology to be embraced."

As this and other research moves ahead, we are likely to find that there is a distinct role for blockchain, but that it is not a substitute for accounting ledgers.

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