In the Mesopotamian Era, a simple system of maintaining balances existed where people will just add and subtract numbers for their costs and sales. The balances were maintained at one end on stone plates. Similar accounting methods also existed in Greece since the fifth century B.C. By the middle ages, a fairly advanced system of accounting which the modern world classified it as Single Entry Accounting. This single-entry accounting system is a method of bookkeeping relying on a one-sided accounting entry to maintain financial information. The drawback was that this system is very difficult to examine for accountability as there were only balance sheets without Income Statements and auditing and reconciliation of accounts was next to impossible. With a single-entry system, all you have to do is remove a line in the ledger and that money no longer exists.
A revolutionary accounting system originated in the 15th Century which is followed even today with further advancements as per current finance and accounting structure. Double-entry bookkeeping allows firms to maintain records that reflect what the firm owns and owes and also what the firm has earned and spent over any given period of time. This is why this system was also termed as zero. It operates a double-entry system so that each transaction creates 2 equal but opposite entries which then balance each other out i.e. the sum of the P&L and BS is always zero. The idea is you want to minimize the errors in your books so what you do is that for each transaction you do two entries in your books. The issue with double-entry accounting is that there is not really any connection between the different sets of books each firm holds.
What is Triple Entry Accounting?
Triple-Entry Accounting framework was first introduced by Ian Grigg in 2005. It is an alternative accounting system to currently established a double-entry accounting framework. This system makes use of the digital signatures, a prevalent method used in asymmetric cryptography to provide a layer of validation and security to the messages before getting transported between the two nodes. It makes the receiver believe that the message was sent by the claimed sender since he used his private key and your public key to encrypt the message.
Every transaction is called a receipt and when they are digitally signed, they are termed as signed receipts. In Triple Entry Accounting, both parties can record the transaction in an MSL (mutually-shared ledger) by providing a signed receipt from both ends. These MSLs are stored in a blockchain where data can’t be compromised or hindered. It’s proof that something happened between two parties, which goes beyond the receipts that each party holds in double entry. Mutually Shared Ledgers are different than Distributed Ledgers. In a distributed ledger, every participant has to provide the consensus to the data being added in the ledger whereas in a shared ledger, only the parties involved in the transaction need to provide the consensus. Adding to this, any participant of a distributed ledger can see the transaction happening between any parties whereas in a shared ledger, the participants can see the transactions only in which they are involved.
Let us assume there are agreements signed between Alice, Bob, and Sue and also by forming pairs. There is also an agreement signed between Sue and Ivan. All 4 of them will be able to see and provide consensus to the mechanism on which they are overlapping. The transactions between Sue and Ivan are not visible to Alice and Bob. The transactions happening in between Alice. Bob, and Sue is not visible to Ivan. The transactions happening between any two of Alice, Bob, and Sue is not visible to Ivan and the 3rd person.
Mutually Shared Ledger (MSL) has the following properties:
- Mutual – Held in common between the multiple parties.
- Distributed – The data is stored, verified, and updated by both the parties with the consent of each other.
- Ledger – The list or details of all the transactions happened between the two parties in a chronological order.
The data uploaded in the MSL will act as the proof of the activity (not PoA) which took place between the two parties and each party can build their private ledgers if they want to. But, to illustrate the model on how triple-level accounting will be updating ledgers and the MSL, the figure 2 is below.
Looking at the figure carefully, the ledger 1 and ledger 2 are not having a double-entry bookkeeping system, rather they are updated with a single-entry system. The Public Ledger (which is the MSL) is following a double-entry system is keeping a list of cryptographically sealed transactions in its database. These lists of digitally signed receipts in MSL provide a strong audit trail evidence of every transaction present in the ledger. A seller books a debit to account for cash received, while a buyer books a credit for cash spent in the same transaction, but in separate sets of accounting records. This is where the blockchain comes in: instead of these entries being recorded separately in independent sets of ledgers, they occur in the form of a transfer between wallet addresses in the same distributed, public ledger, creating an interlocking system of permanent and objective accounting records.
This MSL can be a blockchain. Each user has a wallet that contains the list of all the transactions that happened through that wallet address. All the entries in the wallet are updated using a single-entry system. Then, there is a public ledger which is Bitcoin’s blockchain which contains all the transactions which have happened on it from any part of the world. These entries are stored as a sender’s address sending and a receiver’s address receiving a Bitcoin, which is similar to debit and a credit entry on a double-entry accounting system.
Below are the benefits of Triple Entry Accounting:
- All entries are cryptographically sealed.
- Data added to the blockchain is immutable and shared, hence it is impossible to falsify or destroy the data.
- It provides an unassailable level of integrity to a company’s track record.
- Cost and time to conduct audits will decline considerably as a large part of the verification is automated (discussed later in the paper).
- Digital signatures along with time stamping and perfect audit trails provide tremendous financial reliability
- Ease in tracking the errors and variance in the transaction
- Anonymity can be established even if the ledgers are public
- Mitigation of human errors, frauds, and operational risks due to consensus mechanism.
- Layers of automated processes bring effectiveness and productivity to the system.