Blockchain Technology: Revolutionizing Financial Accounting Practices

This report delves into the transformative potential of blockchain technology within the realm of financial accounting. It explores the evolution of blockchain through its various phases, highlighting its shift from cryptocurrency trading to broader financial applications, including smart contracts and decentralized systems. The report emphasizes the benefits of blockchain in accounting, such as real-time reporting, enhanced transparency, and the potential for triple-entry accounting. It discusses the arguments supporting blockchain adoption, including cost reduction and improved data integrity, while acknowledging challenges such as software compatibility and organizational readiness. Furthermore, the report analyzes potential issues associated with blockchain implementation, considering technological, organizational, and environmental contexts. It concludes by emphasizing the importance of regulatory understanding and adaptation for successful blockchain integration within the accounting and assurance ecosystem.

Running head: FINANCIAL ACCOUNTING THEORY AND PRACTICE
Financial accounting theory and practice
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Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Question 3........................................................................................................................................4
Question 4........................................................................................................................................5
Reference and bibliography.............................................................................................................8

2FINANCIAL ACCOUNTING THEORY AND PRACTICE
Question 1
Three phases of blockchain technology
Since the year 2009, blockchain is evolved through 3 phases – blockchain 1.0, blockchain
2.0 and blockchain 3.0. Phase of blockchain 1.0 was completely focused on cryptocurrency
trading. Different functions including transfer of digital money, payment and remittance includes
new ecosystem that is internet of money. Blockchain 2.0 revolves around similar kind of trading
but it covers wider scope regarding financial appliances. These types of applications include
smart property, derivatives, ownership of digital asset. For expansion of trading that is ranged
from simple digital currency to wide variety of the products, new kind of application known as
smart contract had been initiated under 2nd generation of the blockchain (Dai & Vasarhelyi,
2017). Computer programs that is operated under blockchain are considered as smart contracts
based on blackchain is verified, executed and enforced autonomously under contract terms.
Smart contract allows encoding of the situations and rules those are agreed upon by different
trading parties. Further, these contracts execute the tasks those are pre-specified autonomously or
settle the contract through verifying the changing circumstances along with the embedded rules
of the contract. Further, the blockchain system is expanded beyond the business and financial
applications through blockchain 3.0. Voting systems, attestation services, products of cloud
storage and even the government administration could dramatically be transformed towards self-
managing, decentralized and monitoring systems. Further, the IoT technology that is the novel
paradigm where pervasive presence are able to interact with each other involves different objects
or things like tags, RFID (radio frequency identification) mobile phones and actuators (Dai &
Vasarhelyi, 2017).

3FINANCIAL ACCOUNTING THEORY AND PRACTICE
Blockchain technology’s potential use in accounting
Accounting profession can hugely be benefitted from using blockchain and the present
pattern eventually may be changed owing to emerging technology. The blockchain along with
related smart contracts are able to be leveraged through secure accounting data store. Blockchain
technology is able to generate new system accounting information that can be used to record the
validated transactions under secured ledgers. These transactions contain monetary exchanges
among 2 parties including collection of payment from the clients, deposit of cash to bank along
with flow of accounting data within the entity. Such system further allows real-time reporting
through broadcasting the accounting information instantly to the interested parties including
auditors, managers, stakeholder and creditors (Dai & Vasarhelyi, 2017). Moreover, under this
system, accountants, managers, investors and business partners can collaborate for verifying
transactions along with providing reliable evidence for the purpose of cross-validation.
Question 2
Triple Entry Accounting
For many years, triple entry accounting (TEA) is under discussion by professionals as
well as academics both. Ancient technology for recording the business activities as well as
transactions is the single entry bookkeeping approach where each of the transaction is recorded
under one account only. Though this approach is efficient and simple, it is exposed to high risks
of frauds and errors as these types of issues are not easy to track and repair. For enhancing
accurateness of bookkeeping system, the traditional system of bookkeeping is based on the
double entry system (Dai & Vasarhelyi, 2017). Though this system can be used for reducing

4FINANCIAL ACCOUNTING THEORY AND PRACTICE
risks associated with error from human documentation, it is not able to offer comprehensive
assurances for the financial statement of the entities. Hence, TEA has recently been proposed for
utilizing as secure and independent paradigm for enhancing the financial statement’s reliability.
Originally, the TEA approach required authorization of transaction processing from the neutral
intermediary with each party those are involved in creating the transactional record that will
result into 3 entries in total (Dai & Vasarhelyi, 2017). However, this approach requires reliable
and independent intermediary for verifying each of the individual transaction. Apart from that,
entries stored by intermediaries are further exposed to risk of the loss or unauthorized alterations
owing to cyber crimes. However, blockchain technology is able to improve the approach and
mitigate the associated issues. It is able to play the intermediary role through automation and
distribution of storage along with the process of verification that provides secure foundation to
prevent irregularity and tampering of accounting transactions. Owing to the nature of the
blockchain, once the accounting entry is confirmed as well as added to chain, it can be destroyed
or altered rarely. Moreover, the technology of smart contract can allow rapid verification of the
transactional records regarding whether they are following pre-specified business rules and
regulations and appropriate accounting standards. Further, through encoding 3rd accounting entry
into the blockchain, self-verifying cryptographically secure and transparent system of accounting
information can be created that may facilitate reliable sharing of data among the business parties
and reporting for the shareholders on continuous basis (Dai & Vasarhelyi, 2017).
Question 3
Arguments made by the author is that blockchain based account as well as assurance
approach provides verifiable, real-time information and assurance that progressively automated
(Dai & Vasarhelyi, 2017). I am agreed with the arguments made by the author. The reason

5FINANCIAL ACCOUNTING THEORY AND PRACTICE
behind this is that the blockchain technology allows speed, provides transparency and enables the
automation in accounting profession. Further, it has potential to improve accountancy through
reducing costs associated with maintenance and reconciliation of ledgers. It helps the
accountants to gain the clarity regarding available resources as well as obligations of the
organization and free up the resources for concentrating on valuation and planning instead of just
keeping the records. In addition to other automation trends like machine learning, blockchain
results into more and more transactional level where accounting is done without the accountant
(Kokina, Mancha & Pachamanova, 2017). Further, through eliminating the reconciliation and
offering certainty over the transaction history, it allows increase in accounting scope. In turn it
brings more areas for consideration those are at presents seems to be difficult and unreliable for
the purpose of measurement like data value held by an entity. Apart from that there is almost no
requirement for confirming accuracy of the blockchain technology with the external sources
though lot of works still required on the part how these transactions are recognized and recorded
under financial statements and the way in which judgmental elements like valuations are decided
(O'Leary, 2017). In the long run period more and more records may move into blockchain where
the accountants, auditors and regulators can access and check the transactions on real time basis.
Despite of various advantages some of the challenges those are stopping implementation of
blochchain technology are most of accounting software are incompatible with the blockchain
technology and adoption requires purchase of the cloud based accounting services. However, the
benefits those can be acquired from blockchain will supercede the challenges involved with it
(Fanning & Centers, 2016). Hence, the arguments made by the author regarding adoption of
blockchain are right.

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Question 4
Potential issues associated with blockchain technology to be used in accounting
3 major aspects those impede or drive adoption as well as usage of any technological
innovations like blockchain are environmental context, technological context and organizational
context (Dai & Vasarhelyi, 2017)
Technological context – major issues involved with adoption of any new system is its capability
and readiness. Many mainstream of blockchain approaches like Bitcoin are of highly demanding
nature regarding storage as well as conceptual power for assuring data security even when
transactional data stream may not be large in size considerably. Hence, adoption of the
blockchain technology in the big corporate is dependent upon projected development of the
bigger storage systems, substantial expansion of the computational power and larger bandwidth
for the transmission of data. Further, management is required to consider scope of the
accounting data and associated information to post under blockchain system for providing
adequate transparency and assuring accuracy. Apart from that sensitive information shall be
protected from the irrelevant parties (Dai & Vasarhelyi, 2017).
Organizational context – established large entities have issues in adopting the disruptive
technologies like blockchain unless the traditional business model of the entity is threatened
seriously. Generally, operation and development of blockchain needs large amount of
computational resources as well as ledger of blockchain shall be allocated for avoiding
corruption and collusion that may lead to heavy overhead for the entities. If it is required to adopt
blockchain technology widely, it shall be started from the location where equal concern is given
to data integrity as well as security and where data volume is not overwhelming, for instance,

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commerce business. Start-ups those intend selling blockchain related products may provide
fertile testing ground. Further, the corporate processes are required to be dramatically changed
with large amount of initial investment for smart contracts which in turn will make the firms to
rebalance the workforce, trusting and placing data in public domain along with convincing the
business partners in participating under open-share environment (Dai & Vasarhelyi, 2017).
Environmental context – regulators play major role in adoption of blockchain under the
accounting sphere. Hence, the regulators shall have strong understanding for technology and its
impact on business. They must consider think regarding the method in which existing standards
of accounting can be adapted with the increasing transparent and verifiable accounting
ecosystem (Dai & Vasarhelyi, 2017).

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Reference and bibliography
Brandon, D. (2016). The blockchain: The future of business information systems. International
Journal of the Academic Business World, 10(2), 33-40.
Coyne, J. G., & McMickle, P. L. (2017). Can blockchains serve an accounting purpose?. Journal
of Emerging Technologies in Accounting, 14(2), 101-111.
Dai, J., & Vasarhelyi, M. (2017). Toward Blockchain-Based Accounting and Assurance. Journal
Of Information Systems, 31(3), 5-21.
Fanning, K., & Centers, D. P. (2016). Blockchain and its coming impact on financial
services. Journal of Corporate Accounting & Finance, 27(5), 53-57.
Kokina, J., Mancha, R., & Pachamanova, D. (2017). Blockchain: Emergent industry adoption
and implications for accounting. Journal of Emerging Technologies in Accounting, 14(2),
91-100.
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.
Rückeshäuser, N. (2017). Do we really want blockchain-based accounting? Decentralized
consensus as enabler of management override of internal controls.
Scott, B., Loonam, J., & Kumar, V. (2017). Exploring the rise of blockchain technology:
Towards distributed collaborative organizations. Strategic Change, 26(5), 423-428.