Let me pull you back to accounting systems again. We've already talked about single-entry and double-entry accounting systems. Focusing more on ledgers drove us to familiarize ourselves with centralized and distributed decentralized ledgers. In addition, even before we had the definition of blockchain cemented in this chapter, we tried to compare it with DLT. Now, we are back to square one, to answer another important question about blockchain in the accounting world.
There are various discussions around the triple-entry accounting system. Many advocates believe that a triple-entry accounting system is an advanced enhancement to the age-old and proven double-entry accounting system. Debit and credit remain the two prime entries, and the third vertex entry is an immutable link to all of the previous debits and credits, which means all of the ledger entries have an immutable cryptographic seal.
Let's say two organizations are performing a transaction; one will post a debit to their account for the amount received while the other organization will post a credit to their account for the amount spent. However, these postings are into different ledgers. We have seen this previously in the banking institute example. Now, these organizations have separate copies of ledgers and then they will reconcile it to ensure that they have a common 'true' understanding. DLT will ensure that there aren't two ledgers. There will be one ledger, which will remains distributed, and blockchain technologies will ensure that the transactions that are posted to the distributed ledger are immutable and securely sealed. Immutability will ensure that it is never tampered with, and cryptography will take care of the security aspects. As a result, enterprise and business do not need to reconcile ledgers as there are no separate silos ledgers.
Although there are various definitions of a triple-entry accounting system, it will be extremely difficult to replace the proven double-entry accounting system. Triple-entry accounting is a complex term; we do not deny the fact that there are enormous benefits of posting transactions to a distributed ledger in a blockchain network. Posting and recording transactions in a distributed, append-only, immutable ledger has many benefits, and we will touch on these in this book.
For example, as soon as a contract is signed, a block is created on the blockchain and a transaction is posted to the distributed ledger in the blockchain network. Someone can issue a purchase order against that contract, and this transaction is appended as a block to the blockchain too, which means it is posted to the distributed ledger as well. Bills can be issued against those purchase orders and payments can be associated with those bills in separate transactions and recorded to the distributed ledger. You have a chain of blocks, which displays transactions from contracts to payments, in a single distributed ledger. This means you have an excellent audit record and real-time visibility of transactions by all of the transacting parties. Permissioned DLTs, such as Hyperledger Fabric, can further enable you to provide restricted access to those transactions. Moreover, those posted transactions need no reconciliations and are immutable and omnipresent.
We just learned that, in a distributed ledger on a blockchain network, transactions are immutable and no one can falsify them. Transactions are timestamped, verified, agreed upon via a consensus, and trusted; this offers an easy way to retrieve, access, analyze, and audit in real time, anytime. A chain of transactions, in the blocks, are tied together and are distributed across the blockchain network, where each participating node has the same copy of the ledger (single truth over the network). In this equation, we have not witnessed a single authority/party as there is no central trusted party; the trust is in the blockchain network and the distributed ledger. Welcome to the blockchain world, a world of distributed double-entry systems.
In conclusion, I personally believe in the distributed double-entry accounting system. You can term it a triple-entry account system if you want to. However, the essence of such an accounting system remains the same—a double-entry accounting system that is distributed, secure, and immutable. In this equation, DLT offers the distribution of the ledger, and blockchain technology will ensure the cryptography, security, digital receipt, and immutability of the single distributed ledger. Therefore, throughout this book, we will use the term distributed double-entry accounting system, which you can still term as a triple-entry accounting system.