When it comes to protecting and managing crypto assets, any certified accountant will stress the need to be organized and proactive. One of the most important components for accounting is developing a comprehensive general ledger that tracks and records all details of asset activity. This allows accountants and businesses to better understand their complete financial picture – from the health of a business to the performance of an asset or investment.
Businesses, accountants and tax pro’s all require strict organization and full control when managing assets and their activity. Maintaining perfect crypto bookkeeping records across accounts and portfolios will help any investor or business when it comes to financial accounting, auditing or tax reporting. More importantly, having records and real-time monitoring of assets can help make better-informed business and investment decisions, while also ensuring no errors or discrepancies.
This can be done using double-entry and sometimes, triple-entry accounting and a new system that incorporates the beloved blockchain.
What is Double-Entry Accounting?
The most common bookkeeping system, double-entry accounting, ensures that for every financial action taking place, a ledger will record the activity on two accounts, credit, and debit. This will result in producing two corresponding and opposite entries to a different account.
When money is borrowed or loaned, the sum is labeled as “credit”. When a business spends money from their account, the sum is labeled as “debit”. In Double-Entry Accounting, a transaction must always affect at least two accounts and with “credit” and “debits” always having an equal sum, resulting in a balanced ledger.
For a quick example, imagine a business takes out a $20,000 investment loan. The ledger would record the newly acquired $20,000 in a debit account (cash) and an identical amount would be placed in the credit account (payable liability) – ultimately balancing the ledger.
Why is Double-Entry Accounting important?
After making calculations using the general ledger with debits and credits accounts, the results should always create a balance. If the resulting sums are not equal, this will indicate an error that must be found and rectified to allow the bookkeeper or accountant to analyze the history of transaction activity to identify where the issue is. Moreover, this ensures that all accounting processes are duly verified to ensure accurate reporting and results. However, while the resulting sum may be balanced, this does not mean no issue exists. But, this accounting system is the simplest method to alert professionals to potential errors.
Double-Entry Accounting has a lot of benefits and advantages and serves as one of the most important accounting systems for the industry and its professionals. But, when it comes to cryptocurrencies and digital assets, it may not be enough for blockchain businesses.
What is Triple-Entry Accounting?
Triple-Entry Accounting leverages the immutability of blockchain technology and a third-party “validator” to apply cryptography as a means to verify and finalize bookkeeping records. Each book will possess the debits, credits and corresponding “receipts” for each transaction.
When it comes to cryptocurrencies, there are immensely complicated accounting and bookkeeping scenarios due to large volumes of transactions and general activity to consider. One core problem with Double-Entry Accounting is the lack of secure verification over the ledgers entries. Technically, it would be easy to conceal transactions or to manipulate the books, because there is no oversite or validator to ensure accuracy.
Without this triple-entry system, there is no direct connection between the different books held by each firm or business. By introducing a third-party, the blockchain mechanism can provide a cryptographic receipt of the activity and a proof of transaction. Blockchains encrypted strength means that no records can ever be falsified or tampered with and guaranteed accuracy via third-party “validators”.
Why is Triple-Entry Accounting important for Crypto?
In an age where cryptocurrencies are growing in adoption and developing new solutions, Triple-Entry Accounting will result in a more secure and transparent ecosystem. By introducing this new accounting system, businesses and investors can depend on the results, reports and maintain faith in the accuracy of the digital ledger.
This accounting system has the potential to revitalize and securitize the Crypto Accounting world by making it easier and faster to verify the legitimacy and accuracy of any financial ledger. The establishment of a safer crypto ecosystem is very much welcomed, as the blockchain/crypto world suffers from a lack of trust.
Cryptocurrencies and blockchain are doing more than just creating digital currencies, they are improving and securing the industries of the world by implementing smarter solutions that trump yesterday’s solutions using tomorrow’s technology.