Hello everyone, welcome all of you to the third article on blockchain. In this article I’m going to talk about how blockchain technology would revolutionize the way accounting was done for generations. Yes, you read it right. Blockchain will challenge accounts. In fact, it will change the most basic concept of double entry accounting system. As a head start, I want you to stop for a moment and think about a single-entry accounting system.
Double Entry Bookkeeping System
As a finance professional I know the impact of double entry bookkeeping on accountants. This is the foundation on accounting concept has built upon and it was there for centuries. If I may explain double entry accounting in an extremely simple way, it is the concept “for every income of money there is an equal outflow in another account” (Debit one account and Credit another account). This results in the famous equation in accounting Assets = Liabilities + Shareholders’ Equity.
This system also allows you to check the accuracy of accounting. If you have made a mistake, the balance sheet won’t balance to the equation given above. It is important to maintain this double entry system when dealing with many outside third parties such as suppliers, customers, service providers and banks as there is a gap in time to verify a certain transaction.
What Happens with Blockchain
With wide usage of blockchain, the above mentioned time gap for verification will be eliminated. Blockchain allows you to share one real time single ledger among all parties involved. That meant you have access to more information and more data about a transaction at any given time.
As an example, let’s say you ship your product to Company A. As and when the shipment processed, you will account for the sale as well as for Company A to owe you money. Now imagine you made the sale through a smart contract on blockchain. You will set all the criteria on the contract before you even start manufacturing. As a result, both parties, banks of both parties, shipping agents and everyone involved with the transaction knows what has to happen when certain pre-set criteria being met. So, you know exactly when you get paid. All the transaction information is being recorded in blockchain ledger in an immutable manner so that you can be certain about the accuracy. All the parties involved in the transaction will be sharing the same ledger and there is no dispute.
This eliminates the need for double entry book keeping to be maintained with each party involved. Same principal applies for bank reconciliation as well. If you and your bank share the same ledger which is updated real time, there is no requirement to do bank reconciliations.
Tax Calculation and Tax Collection
Tax is one big hazard experienced by accountants in daily basis and one of the most inefficient revenue collection models by many state governments around the world. Lot of businesses and individuals don’t understand Tax regulations and many governments find it difficult to collect Tax accurately. Therefore, naturally it creates a niche market for tax consultants.
With blockchain, tax collection can be automated. Sales tax could be remitted in real time on per sale basis. You as a tax payer will be automatically tax compliant and the government would be able to collect the tax revenue in real time. There are many states already which accepts Bitcoin and other cryptocurrencies for tax payments.
As you may be already aware China and Japan are experimenting to introduce state owned Cryptocurrencies. China has already introduced this as a pilot project in one of their cities. Once countries introduce state digital currencies the tax collection process would become even more streamlined and therefore the accountants will have nothing to do on tax calculations.
What is the Future for Finance Professionals?
The knowledge of accounting, double entry bookkeeping, ledger entries and preparing financial statements itself is not going to give you any competitive advantage in the future. These functions will be soon automated and basic accounting concepts such as double entry systems will be outdated. However, accountants and finance professionals can provide much more value adding services to organizations. Future is about using these technologies to contribute in strategic level.
Accounting is about reporting the financial transactions accurately. Which can be easily automated. Finance management is about questioning the reports, find solutions and implementing those solutions to ensure better performance. That is the future.
Accountant in Future
|Work in accounting domain||Work in management domain|
|Technical knowledge||Commercial knowledge|
|Works only with finance||Works across the organization|
|Speaks in accounting jargon||Fluent in business language|
|Focus on facts and figures||Also deals with ambiguity|
|Complies with standards||Solves problems and manages changes|
|Do the processes likely to be automated||Will have interactions less likely to be automated|
Your challenge is about re-skilling yourself to be an accountant the future needs.
These Changes not Going to Happen in Near Future?
You must be thinking even though these changes may take place in your industry, it will take a long time and there is nothing to be worried about your accounting profession. Let me give you a small example. When credit cards were first introduced, no one was interested. People were very comfortable using cash. They couldn’t believe cash which is worth so much would be replaced by a piece of plastic. Just check your wallet and see how much cash you have and how many debit/credit cards you have today. This is just a simple but huge change we experienced within few years.
Similarly, few months back, we were so comfortable visiting a bank branch to fulfill all our banking needs. But with the COVID-19m pandemic we had to start using mobile/internet banking which is becoming a norm. My advice is not to wait till change to happen. It’s a very dangerous bet. Change is inevitable. If these technologies are being tested and implemented in few parts of the world, it will not take too long to become mainstream.
It’s better to be prepared than feel sorry when it is too late. I recommend you to read my blog and follow it in the future as well to get yourself updated with the technological developments and changes taking place in financial industry. FINTECH is not a concept. It is a practice and a change which is already happening.
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