Reduction in manning, avoiding time consuming work and fast tracking the payment process is a new emerging concept of every business unit. A ‘blockchain’ concept where the transactions proceeded in-steps, digitally once validated, its quick, reliable, avoid duplication and updating each parties involved in it instantly, brings it all.
A new concept has emerged in our accounting world...BLOCKCHAIN. Many being suspicious, coming with various questions such as,
How secured it is?
How safe is for payment?
What about data integrity?
What would be auditors’ role?
Can someone steal data or manipulate it?
These questions are way normal and raised by anyone who is new to the concept ‘Blockchain’. There is a general belief that it is a part of ‘crypto currencies’ process and transactions whereas ‘crypto currencies’ are only one of the application of ‘Blockchain’.
Here, we are going to discuss how ‘Block-Chain’ is useful for accuracy, process, transparency of transactions and safety of data.
The way world is changing its financial transaction process, we all are in the game whether knowingly or un-knowingly so important for all us to understand the basics.
The way world is changing its financial transaction process, we all are in the game whether knowingly or knowingly so important for all us to understand the basics.
Blockchain concept is basically a shared ledger concept, so it shares all transactions with each participant. We can call it as ‘Distributed Ledger technology’.
For easy understanding, we can explain it in few points:
1. Each activity or agreement or process or payment would have a digital record, thus removes risk and increase trust between users.
2. Transactions, once validated, a key created and shared know as ‘block’.
3. Users, machines and algorithm will interest and transact freely between each of them.
4. It will thus save cost & time.
With the above, all parties share each transaction and can do a transaction themselves as well. Each transaction has a trace in a form of a chain which enables reaching or checking the history of any transaction or payment. Thus, once each transaction is ‘validated’ the system creates a ‘block’ and added to other blocks in a digital form.
Transaction ====> Validation ====> Block created ====> Added to other Blocks
We can take an example of Accounts Payable transaction where 4users are part of ‘block chain’. where once Purchase Order issued to vendor (transaction 1) a block created, when the vendor supply the goods to purchaser (transaction 2) another block created, Good received by Receiving/Stores (transaction 3) another block and then the system will release payment (transaction 4) based on the blocks created. With each transaction, first validated, then a key(block) generated and shared between all users so any point of time, all we’re aware of the progress of activity. Transaction validation is the most important part by each user after completing his part. The system release of payment based on fixed credit days and then it will reduce the cost & time with activity.
Traditional accounting process is, Accounts payable to verify, check each transaction based on the stamp or receiving record of stores and now, system completes it.
Looking complicated, but its system flow like a well-oiled machine. It’s a system driven and each step need validation makes it more secure. The system should not be faulty or with Lupe holes, so before putting a system in process, need to validate the correctness of process.
WE can refer to an example which explains how we are using these concepts in our daily routine. Let’s say, if I order pizza using mobile app, transactions looks easy whereas on back-office front, controlled by an automated system where all the series of transactions work and share information at the same point of time which makes it accurate, reliable and trustworthy. This system updates all parties same time, or each one knows the progress in job; 1) Restaurant get informed of pizza order, 2) Kitchen informed so they start preparation, 3) Delivery Boy informed about upcoming job and 4) Accounting updated with payment. With-in a flick of second.
All 5 participants in this transaction will know about pizza order, delivery time, payment process. No duplication or confusion, and entire process is digital where each completion of job generates a ‘key’ in a form of a block and it will add to other blocks and anyone can check the trail.
Now, when pizza delivered, the delivery boy closes the transaction and that ‘digital’ transaction will update all the users of completion of the job. Next day accounting department does not need to trace each transaction with payment, it automates the reconciliation process same time when the job was in process. The automated system will give an entire full day update or even minute-by-minute to Management if needed.
We all know about frauds and dummy transactions where many Individual, organisations and even banks involve, all these issues are because of there is no reconciliation process.
The auditors or investigators can unearth any wrongful transaction only by having reconciliation, and that’s the beauty of using ‘block-chain concept’ where we have automated reconciliations and any next transaction cannot take place unless the previous transaction validated and block created. There is no scope of reversing or deleting transaction as all parties’ records are getting updated at the same point of time.
Also, when any company or real estate are in sale process, or in amalgamation etc, the first job is to get the records verified and recorded. Only ‘reconciliations’ which are time-consuming and expensive work can verify this (we need experienced accountants for these jobs).
Block-chain automated process will reduce time and cost, more efficient and more reliable, and we can sum it up its benefits;
a. Transparency in Ledger/transactions
b. Accuracy in tracking data
c. Reduction in Cost
d. Immediate processing
Although, there are implementation challenges with its complex set-up and absence of regulatory implications.
However, most of the organisations and even government agencies working towards it. UAE government has taken ‘Block-chain’ as a national project, so change is coming soon....
It explains the basic concept of Block-chain and how it's going to get into our daily routine and system, which will reduce workload, make it more reliable and accurate.
We are going to discuss 'smart contracts' and 'crypto currencies' in another article being a frequent user of 'Block-chain' concept.
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