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Blockchain technology explained
Blockchain may have started out as the underlying technology for the cryptocurrency Bitcoin. But it has since evolved far beyond digital currencies and now offers accounting capabilities that have the potential to revolutionise numerous financial processes. So, what does this mean for your career in finance? Here’s what you need to know.
Accounting professionals measure, communicate, and analyse financial information.
Blockchain can help with this in a variety of ways, not least by allowing accountants access to decentralised ledgers that can be used to keep secure and transparent records across a network of computers.
What is blockchain?
Blockchain is distributed ledger technology (DLT), a digital system that records asset transactions in multiple locations simultaneously.
It is called blockchain because it forms a chain of building blocks that represent different interactions and transfers, for example of money, securities, land titles, or person data.
Each transaction is recorded in a block, and these blocks are linked together in a chronological chain – hence blockchain!
How blockchain works – a step-by-step guide
Step 1
It records a transaction, showing the movement of physical or digital assets from one party to another.
Step 2
It asks all relevant participants to agree that the transaction is valid.
Step 3
Once a consensus is reached, it writes the transaction into a “block” (much like ledger book page in digital form), which is then linked to the other blocks in the network using a cryptographic hash.
Step 4
It shares the latest version of the records to all participants in the network.
How is blockchain technology changing the accounting profession?
Traditionally, accountants keep records in a centralised location, in more recent years this has usually been the database of an accounting software application.
This model is based on a double-entry accounting system; accountants enter records into the system and retrieve the data once it is required before passing it on to the client or employer.
With blockchain, however, the system becomes triple entry; all stakeholders – accountant, auditor, client, and regulator – can view the records at any time because they are shared across a peer-to-peer network of computers, or nodes, in a range of locations.
But no-one can make changes to the records without the permission of everyone involved.
For accountants, the advantages of using blockchain in this way include:
- Each participant in the network has a copy of the entire blockchain, and no single entity has control over the entire system.
- Businesses can input their transactions directly, creating a connected network of permanent accounting entries.
- Entries secured using cryptography, so it’s virtually impossible to manipulate or erase them, reducing the risk of errors, disputes, and fraudulent activity.
Decentralised ledgers are not the only ways Blockchain can be used in accountancy, though. Other applications for the technology include so-called smart contracts, or self-executing contracts that have the terms of the agreement directly written into code.
They can be used to automate accounting processes and reduce the work involved in tasks such as invoicing and payment processing.
When it comes to payroll, for example, smart contracts can automatically calculate and pay out employees’ salaries based on predefined rules, such as how many hours they have worked that month – making it easier for business to pay people quickly and accurately.
When it comes to payroll, smart contracts can automatically calculate and pay out employees’ salaries based on predefined rules
Are there any downsides to using blockchain technology in accounting?
One potential disadvantage of blockchain is that – because data can’t generally be modified once it is recorded – it’s also challenging to erase any sensitive data entered by mistake.
And that can cause data privacy issues when things go wrong.
As many companies still operate legacy accounting systems, there may also be a lot of work required to convert existing data into a format that can be used in blockchain.
How can today’s students prepare to work with blockchain?
Understanding blockchain technology is not easy. So, accountants of the future will need to upskill in areas such as programming languages and blockchain architecture to effectively navigate and leverage this technology.
That’s not to say they need to be fully fledged computer programmers. But they will need to be able to explain complex blockchain concepts in a way clients and other stakeholders can understand.
Certain roles are also likely to change as the technology becomes more entrenched.
Auditors, for example, will be more closely involved in validating systems of governance and controls, and the security and integrity of data within those systems, than in tracking down and checking the financial data they need to do their work.
And accountants of all kinds will almost certainly need to work more closely with the IT department 10 years down the line.
If you want to get ahead of the curve when it comes to blockchain accounting, one option is to sign up for an online course that gives you a greater understanding of blockchain itself. Some of these can be done in just six hours, while others take several weeks or even months to complete. Just make sure you choose a reputable training provider. If you have any doubts, you could ask your AAT tutor for advice on which type of course to do.
Accountants of the future will need to upskill in areas such as programming languages and blockchain architecture to effectively navigate and leverage this technology
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