Nowadays, blockchain reshapes the functionality of the fintech industry, invoking a significant interest in institutions that work with financial operations directly. We’re talking about accounting, which starts integrating blockchain technology to its daily operations.
Accounting is a noticeable area for blockchain innovation due to the significant improvements it can present. Businesses experience growth of interest in secure financial operations. The elimination of a single-point failure and cryptographic encryption can reduce the dependency on the centralized intermediary and protect financial transactions by improving security and economizing protection costs simultaneously. The article analyzes what is blockchain used for in accounting and its benefits.
How Blockchain Is Transforming Accounting
As a distributed and public ledger, blockchain benefits versatile fintech and business branches due to its possibility to record transactions that cannot be altered. The impact of blockchain in accounting is significant as it eliminates manipulations with records and minimizes human errors. We’re going to focus on fraud prevention and error detection capabilities of blockchain in accounting.
Fraud Prevention
Blockchain undermines the pain point of fraudulent actions through immutability and security.
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Immutability
As stated above, the transaction is recorded, while the record is immutable. This is important for accounting to fraud prevention because it makes it difficult for fraudsters to manipulate revenue or conceal expenses.
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Safety
Authorized parties can access a real-time ledger, proving that blockchain can reduce the likelihood of fraudulent reporting. The auditors can cross-check the transactions in real-time, which greatly reduces the risk of any manipulations in the financial statements.
Moreover, with triple-entry accounting, the blockchain makes it hard to commit double-entry fraud. Transactions are cryptographically linked and recorded in the distributed ledger, making identifying fraudulent actions easier.
Error Detection and Overcoming
Blockchain helps to identify common human-factor mistakes and helps overcome them via smart contracts and AI integration.
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Human Errors within Data Entry
Blockchain helps resolve issues like incorrect figures or duplicate entries. Multiple parties validate the transduction cryptographically prior to recording. Smart contracts will automate the transactions, minimizing human input.
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Duplicate Transactions
Blockchain can help prevent accidental duplication of invoices, expenses, or payroll payments based on the correct realization of smart contracts or transaction control systems. The chances of record duplication are reduced as each transaction gets a unique cryptographic signature. Blockchain’s task is to ensure a real-time reconciliation by underlining the duplicate entries.
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Transaction Misclassification
Another human error in accounting is assigning the wrong category for revenue, expenses, or liabilities, which results in erroneous financial statements. Smart contracts and AI analyze transactions and mark inconsistencies, while the immutable ledger ensures proper classification.
Key Benefits of Blockchain in Accounting
Accounting organizations can optimize their record processing, minimize fraud, and economize financial input by integrating blockchain technology. Let’s analyze the advantages of blockchain in accounting into the following categories.
Transparency
The blockchain works on the distributed ledger that instantly records any transactions and displays them to authorized users. The immutable ledger eliminates the possibility of changes and is deleted once the finance-relevant operation is recorded. Finally, one of the key benefits blockchain brings to accounting is the absence of dependency on centralized units. All the required stakeholders and auditors are independent in verifying transactions.
Security
Blockchain and accounting are intertwined based on security intensification. Now, let’s analyze how exactly blockchain helps accounting improve the security of its operations.
Blockchain assists accounting services in preventing and reducing fraudulent activities due to the cryptographic security mechanisms that protect against unauthorized access. Another way of supporting safety in accounting is securing financial data through advanced cryptographic encryption. Blockchain can prevent unauthorized alterations in the transactions via the consensus mechanisms that verify and record those operations.
Finally, as in blockchain, there is no need to rely on a third party; decentralized storage minimizes the risks of cyberattacks. For instance, Deloitte relies on machine learning in blockchain that helps check, mark anomalies, and set a risk rate for the transaction.
Nevertheless, it is important to remember the existing threats of cyber attacks on the users’ non-custodial wallets, smart contracts, and network nodes. The intermediary can store data in a centralized server, making it vulnerable to a single-point attack, while in the blockchain, decentralized storage eliminates this single-point failure and reinforces tamper resistance, making the records immutable based on the blockchain hashing.
Efficiency
Blockchain in accounting applies smart contracts that automate financial transactions. Manual intervention and processing are not required. The ledger facilitates real-time financial reporting, so there are no delays in data processing. The distributed nature of the ledger allows auditors to determine if the transaction was legitimate. Overall, blockchain improves the efficiency of accounting services by minimizing the need for repeated data entry, which minimizes human errors.
Cost Savings
Blockchain minimizes overhead and manual transaction processing by excluding the dependency on third parties and eliminating the need to perform manual audits.
Blockchain favorably affects compliance costs by ensuring automatic alignment with accounting regulations. Finally, blockchain minimizes costs associated with error corrections and fraud detection.
How Can Blockchain Be Used in Accounting?
Indisputably, the organization specializing in accounting can benefit significantly from integrating a decentralized ledger due to improved security, optimized time, and efficiency in verifying and operating transactions. But what are the practical examples of blockchain in accounting? Let’s clarify.
Auditing and Assurance
Traditional accounting depended on third-party confirmations to check and verify whether the financial record was legitimate. Audits were time-consuming due to manual proceeding and verification. Blockchain functionality is based on the smart contract, which benefits audit compliance. It is possible to pre-program specific financial processes to follow audit rules automatically. Auditors don’t have to wait for periodic reports. Instead, they can access data in real time.
Tax Compliance
Traditional manual tax management faced the challenges of income misreporting or purposeful dedication, which led to tax evasion and non-compliance. Here on, tax audits can be time-consuming to complete.
Integrating blockchain into accounting can eliminate invoice falsification. Smart contracts can automate the process of invoice verification in real-time prior to processing the tax claim. However, the correctness of data depends on the source information checked by the accountants. The immutable ledger ensures no record can be altered, eliminating the manipulation of tax-relevant data. Finally, due to the integration with the API of tax offices, smart contracts can calculate and file tax automatically based on recorded transactions.
Payroll Management
Payroll management encountered the dilemma of ghost employees who could divert and manipulate funds. Implementing blockchain technology in accounting can eliminate potential fraudulent actions in the following ways. Smart contracts can contribute to payroll automation by the automatic proceedings over the salaries only when the predefined conditions are met. Secondly, in blockchain, the payments will be analyzed only when the ID of the verified worker matches with the work records. The next point is that blockchain ensures the records are tamper-proof, meaning that no insider can manipulate the payroll records.
Supply Chain Finances
The accounting organizations faced the problem of delayed payments from suppliers. The issue emerged because of the prolonged manual invoice verification. Moreover, manual reconciliation between vendors and clients delayed accounting processing. As blockchain provides real-time reconciliation, it can be integrated to eliminate the presented problems. This translates to real-time transaction recordings, removing the need to carry out manual reconciliation. One of the examples of blockchain in accounting is EY’s blockchain analyzer reconciler applied to reconcile and match transactions. The approval of received items stimulates automated payment processing, which eliminates data manipulations, providing accounting with real-time financial tracking.
Agilie, Your Reliable Partner
Agilie is a European IT outsourcing organization that crafts from scratch and optimizes software solutions that align with our clients' boldest ideas. Specializing in fintech, mobile banking, and payment solutions, our software benefits multiple industries, including fintech, marketing, logistics, healthcare, real estate, etc. We aspire for client-centricity by aligning with the client’s unique needs and embedding them into effective and time-preserving SDLC-based product development.
Our blockchain software services include:
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Blockchain Development
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NFT Crafting
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Smart Contract Development
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Decentralized Finance Development
Gain insights into the versatility of our tech experience with Agilie Success Stories.
Conclusion
The article answered the question of how is blockchain used in accounting by demonstrating its advantages and use cases. Blockchain technology excludes the reliance on intermediaries and streamlines efficiency by minimizing manual reconciliations and ensuring security and cost-effectiveness.
Smart contracts automate the transaction verification process, can prevent data falsification, and, by operating on decentralized storage, will make sure that no single entity will have control over the financial records and operations. Therefore, it is important to collaborate with skilled IT professionals who can integrate blockchain technology into your system to ensure the security and integrity of your accounting processes.
Don’t hesitate to contact us if you want to integrate blockchain into your accounting services.
