Blockchain and Accounting – The Basics

Blockchain and accounting – what do we need to know now?

Blockchain is going to be one of the most significant technological advances of our lifetime. It is also one of the most difficult technologies of our lifetime to explain. If you have listened to people explain blockchain several times or read multiple articles on blockchain and still don’t get it…you’re not alone. The idea of blockchain has highly intelligent people banging their heads against the wall. Despite the incredible potential of blockchain to reshape the world as we know it, there is still little understanding of what it is, what it does and why it is so revolutionary.

Remember when we didn’t understand the internet?

Today’s revolution of blockchain is kind of like the early 1990’s when everyone was trying to wrap their brains around the internet. Back then no one really understood the idea of the internet and how it was going to change our lives. Now, we can’t even fathom our lives without it. We all know what the internet is…or do we? Could you really sit down and explain what the internet is to a five year old? Yeah, me neither.

Do we need to know how the sausage is made, or do we just need to know it’s there?

I consider myself a fairly intelligent college graduate, but I don’t really understand how the “internet sausage” is made. For most people, understanding blockchain is going to be a lot like their understanding of the internet. We will know what it is, what it does and why it is so revolutionary…but maybe not understand it enough to explain it to a five year old. Internet sausage, blockchain sausage…it’s all sausage and who really wants to know how that’s made. But, we do need to understand how blockchain and accounting will come together, and the relevance it has for our industry.

Meat products aside, here’s the basics on blockchain.

Blockchain is like a giant accounting ledger or list. It can keep track of anything from money to blueberries and you can trade that money or blueberries with anyone. Blockchain is the technology that is the underlying processor for those transactions. When you make these transactions you don’t need to rely on another organization or even trust the other person you are trading with. Blockchain takes reputational trust and shifts it to mathematical trust. The use of blockchain is not limited to just buying and selling, any type of information can be recorded on a blockchain.

Today, we store all information on one centralized giant computer essentially putting all our eggs in one basket. The information on a blockchain is recorded and copied onto many different devices that are connected to each other to form a network. When new information is added, all the devices are updated instantly and simultaneously. You’ll hear people refer to this as decentralization.  If the information is lost on one device, it is safe on another device in a different location.

What is blockchain’s superpower?

Blockchain solved the challenge of having all the different devices agree when new information is added and to do so without anyone cheating the system. Because of this, everything that is recorded on a blockchain cannot be changed. Once a transaction is made, it cannot be reversed. If you are sending money, you better darn well make sure you’ve got it right before you hit send.

Here is why the technology is so groundbreaking.

When information is added it is packed into blocks. Each of these blocks are linked together with similar blocks of information to create a chain. When the information is added it creates a special code that everyone can see and check to make sure it’s valid. Every time more information is added to the chain that code changes to show the change. If anyone tried to modify the data that was recorded, it would wreck the code and it would be visible to everyone. This is why all information on a blockchain is always correct.

So, how do blockchain and accounting correlate? Why should it matter to us? 

If everything moves to blockchain and all the information is an immutable and transparent record, it streamlines the audit process. It’s a vast improvement over traditional procedures that can be riddled with errors and fraud. Enron anyone?

There will be no more digging through paper trials and audits can now be automated. This will reduce cost and time for audits. Firm’s that are digging into blockchain will gain speed and accuracy in the industry which will help their competitive edge.

How do us marketers come into play…communication! When this new technology starts to hit the main stream and within our firms, it will be up to us to communicate it to our clients and staff. We will not be able to properly communicate about blockchain if we do not have somewhat of a grasp on the concept.

You will not need to understand how the blockchain sausage is made – that’s for the developers. What you will need to understand is how to use it to your firm’s and your clients’ advantage – this keeps YOU relevant and in demand.

AAM Minute: Beginner’s Guide

Jennifer Cantero, Sensiba San Filippo