Financial statements are an integral part of any business. For many years now, double entry book keeping has been the format used by businesses for keeping their financial records. Currently however, there is another accounting format that has come up due to blockchain and distributed ledgers and that is the triple entry accounting system. Despite its name which may give the impression that it is just an advancement of the double entry accounting system, it involves other principles as well.
In this blog, we will learn about double entry accounting and triple entry accounting as we get to know how each system works, how they are different from each other and where triple entry accounting fits into the current U.S. financial world.
What Is Double-Entry Accounting?
Double-entry bookkeeping is the traditional way of booking transactions using debits and credits. All transactions affect at least two accounts and debits must be equal to the credits. This ensures that there is an inherent check within the system for proper accounting.
How Double-Entry Accounting Works
Think about a company which has spent $5,000 on equipment in cash. $5,000 will be debited from the Equipment account, as there has been an acquisition of an asset, while $5,000 will be credited to the cash account, as cash has been reduced.
The accounting equation – assets = liabilities + equity – stays balanced in this case. This concept is applicable in transactions related to income, expenses, Accounts Receivable, borrowing, inventory, salary payments, etc.
|
Transaction |
Debit |
Credit |
|
Purchase equipment for cash |
Equipment $5,000 |
Cash $5,000 |
|
Make a $2,000 sale on credit |
Accounts Receivable $2,000 |
Revenue $2,000 |
|
Pay $1,000 rent |
Rent Expense $1,000 |
Cash $1,000 |
The transactions are first evidenced through source documents, and journalized through the accounting system. From there, the transactions are posted to the general ledger and eventually become part of the preparation of financial statements.
Why Double-Entry Accounting Remains Important
The double entry system of accounting provides an organized way of recording accounting transactions and helps to spot particular errors. When the total of debits and credits does not tally, then the accounting records should be reviewed.
A balanced trial balance does not ensure that all transactions have been properly recorded. Even the misclassification of an accounting transaction may lead to equality between the debits and credits. This is why companies need more than just the basic double entry system.
Key Benefits of Double-Entry Accounting
Double-entry accounting remains widely used because it provides a structured framework for financial management. Its major benefits include:
- Better financial control: Transactions are recorded across corresponding accounts.
- Error detection: Unequal debit and credit totals can reveal certain recording errors.
- Financial reporting: The system supports preparation of income statements, balance sheets, and cash-flow information.
- Audit trails: Accounting records can be traced back to supporting documentation.
- Completeness: Properly maintained ledgers provide a structured record of business transactions.
- Scalability: The method can support everything from small businesses to large corporations.
What Is Triple-Entry Accounting?
The triple entry accounting is a novel form of accounting wherein there is a third transaction log apart from the traditional accounting entries kept by transacting parties. In case of blockchain based accounting systems, this third component can take the form of cryptographically secured log linking transaction information.
How Blockchain Can Support Triple-Entry Accounting
Consider the case of the sale between a buyer and a seller taking place in the online world. Within the traditional double entry accounting, the transaction is recorded by both parties individually in their accounting records. The buyer will make the necessary debits and credits while the seller will do the same within his/her accounting records.
There is also the potential for creating a cryptographically secure transaction record within a blockchain based triple entry system which connects the transaction between the parties. It means that in lieu of two different sets of records that need to be reconciled, there would be one common set of records. This is the reason why triple entry accounting is considered within the realm of distributed ledger technology.
Potential Benefits of Triple-Entry Accounting
The benefits that may be accrued from using the concept of triple entry accounting include minimizing reconciliation costs and generating more robust transaction level evidence. The use of a common ledger will allow for a common source of information that can be used by all participants involved in the transaction.
Potential benefits can include:
- Shared transaction records: Participating parties can reference a common record.
- Greater transparency: Authorized participants can verify transaction information.
- Stronger traceability: Cryptographic records can make subsequent alteration more difficult.
- Reduced reconciliation: A shared transaction record may reduce differences between counterparties’ records.
- Automation opportunities: Blockchain-based systems can interact with smart contracts and other automated workflows.
- Audit support: Transaction-level blockchain information can potentially provide useful evidence for accounting and assurance procedures.
However, they are potential strengths, not guarantees. Blockchain technologies create new problems regarding governance, cybersecurity, access control, implementation, and accounting. AICPA & CIMA observes that blockchain can improve certain controls if properly implemented, but it also creates new risks and controls.
Double-Entry vs. Triple-Entry Accounting: Key Differences
The two methods are interrelated, but they cannot be considered competing bookkeeping systems in the exact same manner. Double-entry is an accounting method; on the other hand, triple-entry accounting usually refers to another level of record-keeping for transactions.
Structure and Recordkeeping
Under the double entry accounting system, every transaction is entered using two entries: one debit entry and one credit entry in the bookkeeping system of the business firm.
The triple entry model uses a third factor, which could tie together the transaction logs of different parties in case of blockchain technology implementation. This third party is used not to add another debit or credit, but to increase the reliability of the transaction evidence.
Transparency and Reconciliation
Conventional double-entry accounting systems may necessitate that counterparties reconcile their books. For instance, the accounts payable for the buyer will match the accounts receivable of the seller, yet the two parties keep their books separately.
Using the shared ledger system will help alleviate the reconciliation challenge since there is one document for the transaction. Nevertheless, there is need to put into place measures of controlling who initiates transactions, who accesses information, how errors are dealt with, and the link between the blockchain accounting system and other accounting systems.
Double-Entry vs. Triple-Entry at a Glance
|
Factor |
Double-Entry Accounting |
Triple-Entry Accounting |
|
Core structure |
Debit and credit entries |
Double-entry plus shared transaction record |
|
Primary purpose |
Maintain balanced accounting records |
Connect transaction records between participants |
|
Typical environment |
Conventional accounting systems |
Emerging shared-ledger/blockchain environments |
|
Data ownership |
Each organization maintains its own ledger |
Shared transaction record may involve multiple participants |
|
Reconciliation |
Often required between counterparties |
Potentially reduced through shared records |
|
Technology requirement |
Standard accounting software |
Distributed ledger/blockchain may be used |
|
Adoption |
Established accounting practice |
Emerging concept |
|
Main challenge |
Recording and control errors |
Technology, governance, integration, and regulatory considerations |
Is Triple-Entry Accounting Replacing Double-Entry Accounting?
Currently not. Triple entry accounting is a field of study and innovation, but triple entry accounting cannot yet be considered a replacement of double entry accounting that has been used throughout the world, especially in the USA.
In general, double entry accounting is still the core principle of accounting, whereas the blockchain technology is opening up new opportunities for transaction recording, cryptocurrencies, auditing, and financing. At the moment, the AICPA & CIMA have a special page on the topic of blockchain and digital asset accounting.
What Should U.S. Businesses Know About Triple-Entry Accounting?
In assessing whether to use blockchain in accounting practices, organizations should look at whether they have any particular needs that require the use of the technology instead of merely using it because it is said to be the next-generation accounting technology.
Potential Use Cases
Triple entry concept might be applicable if a number of entities need a dependable way of recording transactions in a common manner. Some of the scenarios could be supply chain transaction, digital asset transaction, inter company transaction, trade documentation, and contractual automation.
Blockchain is already relevant to the accounting and audit process in the digital asset context. The resources offered by AICPA & CIMA already have guidelines in accounting and auditing for digital assets and stress the need for knowledge about blockchain technology.
Limitations and Risks
The idea of triple entry accounting should never be marketed as fraudproof and error proof. While the blockchain ensures that certain information can become immutable once it is stored on it, it does not ensure that the information being stored was correct to start with.
Companies should think about private key management, access control, privacy, cybersecurity, interoperability, governance, regulation, and integration with the current enterprise system. Even though the information in a blockchain can become immutable, it can become incorrect if wrong information was entered into the system initially.
How Accounting Firms Can Prepare
There is no need for accountants to replace their existing accounting system in order to comprehend blockchain technology. Rather, the organization can start with building up knowledge in the areas of distributed ledgers, digital assets, smart contracts, controls in blockchain, and how these technologies could impact accounting and auditing.
Professional training and specialized assistance would allow companies to figure out if the use of blockchain technologies solves their particular problem. If an organization is not ready to adopt new technology, then there is nothing wrong with the traditional system of double-entry bookkeeping.
The double entry and triple entry accounting systems are the two varying levels of thought process in relation to recording and verification of financial transactions. The double entry accounting system is the established standard of bookkeeping in businesses and uses the concepts of debit and credit accounting to keep a balance within the books of accounts.
The triple entry accounting system is based on a new idea whereby the accounting records of the parties involved in a transaction are linked through a common transaction record that may be based on a blockchain or any other form of distributed ledger technology. Despite the many advantages associated with this system, it is still not well developed for businesses to adopt universally.
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