Written by FSN writer Darryl Bannon
The humble debit and credit. came courtesy of the Italian Renaissance. As we all know it was invented as a means to record what is owed and what is due through a double entry check.
Therefore, it is somewhat poetic, that a digital renaissance within banking- Fintech, has presented us with a triple-entry paradigm.
Why a third?
Traditional double-entry was established at a time when companies had a small networks of suppliers and customers. However, global exploration and technology opened up markets, resulting in an ocean of transactions. While technology has provided better recording systems such as ERP, payments, invoices and transaction still go missing or fall into dispute.
Despite supply chain innovations, organisations still struggle with 3-way matching, accounts receivable and other transactional entries. Why can’t we validate transactions at the point of contract?
This element of validation, is at the heart of distributable ledger technology (DLT). (Without repeating definitions, it’s important to note that Blockchain is often used as a blanket term. It is in fact, one of a few methods for validating transactions within this group of technologies).
A shared ledger between a network of vendors and suppliers means that instead of both parties having to enter their own transactions in detail in two separate sets of books, one transaction can be entered and validated in the network. The reciprocal entries will then be booked simultaneously for both parties into their respective systems at the control account level. Think of a shared ledger as an adjudicator of transactions.
This network can be extended to include banks and tax authorities. Imagine VAT being recorded real-time and no longer having to prepare returns? Or bank payments pre-approved and ring-fenced to settle as per payment terms?
As only permitted parties can be part of this network and transactions are recorded real-time, greater trading transparency can be achieved. Shortages in the network can be picked up and any trading difficulties can be assessed by the network. Therefore potentially reducing the risk of non-payment and failed contracts.
New model for trading?
Organisations have been exploring methods for reducing transactional reconciliation for some time. DLT’s offer a secure alternative by collaborating within a secure network to reduce transactional volumes. While some will have issues with their competitors having visibility of their transactions, independent approvers can be put in place. Imagine an external financial controller team for a network, who can have oversight without individual companies being privy to contract terms. Or perhaps shared services evolving to this role?
As shared ledgers sit on top of existing in-house accounting systems, how organisations choose to enter and engage over these networks will depend on the industry. For some industries, there is growing pressure to verify authentication of materials, e.g. diamond trade, pharmaceuticals and branded mechanise.
By only trading with network members, organisations can reduce or eliminate the risk of counterfeit goods or using illegally sourced materials. Not only that, any contracts placed will have entries automatically validated and journalled into their respective general ledgers.
While DLT is in its infancy for accountancy and the above refers to B2B applications, internal applications such not be ignored.
According to E&Y 21% of American organisations are investing in DLT’s for planning budgeting and forecasting. Could we see an end to cumbersome transactions between multiple legal entries, divisions and systems? Might DLT herald a new era of more accurate and timely collation of data for PBF?
Either way DLT is becoming more of a reality and we might just be adding a new word to the accounting lexicon, to join our debit and credits - a Valit entry?