Blockchain and the Accounting Revolution

It is being said that blockchain will revolutionize accounting, because it enables an independent record of all transactions in a separate distributed ledger which is available, shared, independently recorded and unchangeable. Essentially, the entries would flow from the record of smart contracts, under which commitments entered into by parties to a transaction would become part of the shared distributed ledger and then the settlement of that contract would be automatically implemented by the contract and also recorded in the distributed ledger. Thus all parties to the contract would have a record of the entire transaction stream from beginning to end. Since these entries flow from the agreed contract and are then generated by that contract independently of the parties, it forms a tremendously valuable part of the audit trail for those transactions. Some have even suggested that this would eliminate the need for auditors, and although this is an overstatement of its effect, there is absolutely no doubt that it will transform the way that auditors work.

The aspect of blockchain that involves creation of the distributed ledger has been referred to as triple-entry accounting. For those with some knowledge of accounting history, this is a jarring nomenclature, as it evokes memories of Yuji Ijiri, the noted professor at Carnegie Mellon University who published a monograph of that name in 1982 along with a paper in The Accounting Review in 1986 outlining the nature of triple-entry accounting. Some academic writing has focused on this similarity and asked the question is the triple-entry accounting of Ijiri the same idea as that of blockchain? Some have said no and others yes, at least conceptually.

It’s not a simple issue. The essence of Ijiri’s model was the introduction of a new measure of performance called momentum and a Statement of Force that shows the rate of change in the organization. The addition of the Force Statement to the traditional Balance sheet and Income statement gives rise to the triple entry concept.

In blockchain, the third element to the accounting process arises from the creation of the distributed ledger that shows a complete record of all transactions in the enterprise – a very different concept.

However, the distributed ledger could easily be used to create Force Statements as it contains verifiable dates of all events through cryptographic methods. So, a logical conclusion is that the Ijiri and blockchain concepts are very different but at the same time that the two are very compatible. Will the Ijiri concept make a comeback? Who knows?

Blockchain is being adopted quite extensively, particularly in situations where smart contracts make sense. And an industry is forming around it. But it has not reached the level of general adoption across the spectrum of accounting. Whether it will remains an open question. But there is no question that it will be a major force in accounting providing new and better accounting controls and perhaps leading to the extension of accounting into new dimensions, like those of Ijiri, or something like that.