Accounting Standards and Blockchain Applications Essay

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Financial Accounting Theory and
Practice
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Table of Contents
Essay................................................................................................................................................3
References........................................................................................................................................5
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Essay
This essay has been written to analyze the relationship between accounting theory, accounting
framework, and accounting standards. The analysis of an academic article written by Jun Dai and
Miklos has been done along with other academic articles to explain such a relationship. The main
focus of the article is to analyze blockchain technology and its various phases along with the
usage and problems of such technology in accounting. Also, this essay would focus on the
analysis and understanding of the author for the Triple Entry Accounting. Different arguments
given by the author have been analyzed in the essay and opinion about the same is given by
overviewing the point of view.
1.
Blockchain technology was initiated by Satoshi Nakamoto using several chains of blocks which
could be used to create decentralized, digitally secured and publically available currency system.
In simple terms, blockchain is a time-stamped series of an immutable record of data that is to be
managed by a number of computers and such computers are not of a single entity (Dai &
Vasarhelyi, 2017). There are many features of the blockchain technology which includes that
blockchain technology does not require any intermediary or central authority thus reducing
transaction cost. There are three phases of evolution of blockchain technology which includes:
 Phase 1.0: This phase mainly focuses on trading in crypto currency and facilitates
functions on the transfer of money digitally along with the remittance and payment. The
main focus is on the online payment of money using internet technology
 Phase 2.0: Blockchain phase 2.0 also focuses on digitalizing financial transactions like in
Phase 1 but the scope of the same is quite high in comparison to the phase 1 as it includes
financial transactions relating to derivatives, digital asset, etc. The main focus of phase
2.0 was on developing the idea of the smart contract which is made digitally.
 Phase 3.0: This phase focuses on the further expansion of the blockchain system after
financial and business applications. This phase includes improvisation of cloud storage
products and government services like attestation and administration services. This phase
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focuses on the linking of IoT with blockchain technology (Ouaddah, et. al., 2017). Also
with the help of this phase the smart devices can be installed in automobiles and other
devices.
Thus it can be seen that the blockchain technology has taken over the digital platform and
various areas including accounting. Following is the potential use of blockchain technology in
accounting:
 Blockchain enhances the profession of accounting by reducing the cost incurred in the
physically maintaining of books of accounts.
 Blockchain helps in providing clarity of available resources with the organization and
helps in planning function of the organization rather than investing time on the
maintenance of records for the company.
 Blockchain helps in expanding the area for accounting which earlier could not be covered
due to the unreliability of the measure thus increasing the scope (O'Leary, 2017).
2.
Triple entry accounting is another type of accounting system which is considered as an
enhancement of the double-entry system generally used for accounting. In this type of
accounting usage of digital means is done for entries involving outside parties where such entry
is sealed by cryptographic third entry. This method is used when there is an addition of the third
particular except for the normally used debit and credit. However the usage of this type of
accounting is efficient and simple but it can give rise to various frauds and errors which cannot
be tracked easily (Faccia & Mosteanu, 2019). This method does not provide the assurance about
the correctness and true and fair view of the financial statements but provides instant
confirmation about the correctness of the transaction entered in the system. Both blockchain
accounting and triple accounting system are interrelated to each other as when the contract is
signed then blockchain is created and by using the entire string of related transactions the update
can be seen using triple entry accounting system. Thus it can be said that triple entry accounting
helps in identifying and recording each contra entry transaction which has been represented in
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three places in the financial accounting system rather than general two places of debit and credit.
Following diagram shows a triple entry accounting system for a transaction:
Source: (Dai & Vasarhelyi, 2017)
Thus the above diagram specifies the flow of transaction and its recording in the triple entry
accounting system and it can be seen that the accounting system follows various phases in case
of such accounting. The entry is first entered in the ERP system and then a smart contract is
created for the same using the blockchain accounting by maintaining the ledger and accounts
specifying the transaction in 3 places in financial accounting.
3.
There were various arguments made by the author in relation to blockchain technology and other
related issues. Some of the arguments made by the authors were agreed upon but there were
some arguments which after analysis of academic resources were disagreed. Following are some
of the arguments given by the author:
 It was held by Peters and Panayi, 2015 that blockchain helps in avoiding conflicts in case
of modifications made multiple times simultaneously by different computers in the
database system which is distributed. It has been agreed that the argument given by the
author is correct to a certain extent as in case of Blockchain accounting there are no
intermediary and there is a direct interaction with the servers and database thus it helps in
avoiding the conflict which might occur due to intermediary (Ying, et. al., 2018).
 Also, it was argued by the author that the drawback of the blockchain model is that the
model is based on a highly trusted entity model and it was held that all the entities which
are verified before becoming part of the blockchain are not engaged into the creation of
any false transactions in the system. However as per the other authors and personal
opinion it was held that the author in this case is correct as the blockchain accounting
give access to trusted entities for creating entries but even after verification false
transactions and entries can be generated in the system as there is no centralized system
in the blockchain accounting to keep a track of the transactions and individuals entities
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are given access of controlling and making changes in the system which is considered as
a drawback of the blockchain and is agreed by several authors (Cai & Zhu, 2016).
4.
There are various issues and potential problems which arise with blockchain technology being
used in accounting. Some of the issues of blockchain technology include the following:
 Blockchain increases the complexity of the accountancy and accounting transactions as it
gives rise to a whole new process which is difficult to adapt and understand for
organizations using the traditional approach of accounting or double-entry accounting
(Tan & Low, 2019).
 Blockchain has a problem of security as the whole process is based on digital platforms
and the same is not managed by the centralized system thus it is easy to conduct frauds
without getting noticed if proper security measures are not applied. This could impact
accounting as it would not guarantee a true and fair view of the financial statements
prepared using blockchain technology. Also, there is a threat of security and threat of
accounting data of the organization as the same is exposed to the untrusted environment
by the use of blockchain technology.
 Blockchain involves a huge cost for maintaining of accounts for the organization as
requires high energy consumption and implementation cost thus it can be seen that the
same has affected the accounting as the organization are not able to cover all the
transactions using the blockchain technology which causes some transaction processed in
such technology and others in traditional method. This creates a problem in cumulatively
understanding all the transactions and provides an overall conclusion and preparation of
the financial accounts (Niranjanamurthy, et. al., 2018).
 In the case of usage of blockchain technology, the false transactions can be entered into
by the entities even if they are verified thus causing problems in the clear representation
of accounts and accounting entries.
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Thus it can be seen from the analysis of the above article that blockchain and triple entry
accounting are relatively new concepts that have been taking over different areas along with
accountancy through the digital platform and use of the internet. Blockchain has evaluated
through various phases over the years and it has brought significant changes to the preparation
and recording of financial statements and transactions. Blockchain technology has solved the
problems related to the intermediary as there is no centralized system and intermediary in the
technology. It has affected the overall accounting system to a great extent with both advantages
and disadvantages of the same on accounting. Also, there were various arguments given in the
article relating to the blockchain technology and the conclusion has been derived along with the
opinion after proper research on such arguments.
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References
 Cai, Y., & Zhu, D. (2016). Fraud detections for online businesses: a perspective from
blockchain technology. Financial Innovation, 2(1), 20.
 Dai, J., & Vasarhelyi, M. A. (2017). Toward blockchain-based accounting and assurance.
Journal of Information Systems, 31(3), 5-21.
 Faccia, A., & Mosteanu, N. R. (2019). Accounting and blockchain technology: from
double-entry to triple-entry. The Business & Management Review, 10(2), 108-116.
 Faccia, A., & Mosteanu, N. R. (2019). Accounting and blockchain technology: from
double-entry to triple-entry. The Business & Management Review, 10(2), 108-116.
 Niranjanamurthy, M., Nithya, B. N., & Jagannatha, S. (2018). Analysis of Blockchain
technology: pros, cons, and SWOT. Cluster Computing, 1-15.
 O'Leary, D. E. (2017). Configuring blockchain architectures for transaction information
in blockchain consortiums: The case of accounting and supply chain systems. Intelligent
Systems in Accounting, Finance and Management, 24(4), 138-147.
 Ouaddah, A., Elkalam, A. A., & Ouahman, A. A. (2017). Towards a novel privacy-
preserving access control model based on blockchain technology in IoT. In Europe and
MENA Cooperation Advances in Information and Communication Technologies (pp.
523-533). Springer, Cham.
 Tan, B. S., & Low, K. Y. (2019). Blockchain as the Database Engine in the Accounting
System. Australian Accounting Review.
 Wright, A., & De Filippi, P. (2015). Decentralized blockchain technology and the rise of
lex cryptographia. Available at SSRN 2580664.
 Ying, W., Jia, S., & Du, W. (2018). Digital enablement of blockchain: Evidence from
HNA group. International Journal of Information Management, 39, 1-4.
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