“Double-Entry” Accounting Methods Not Ideal For Cryptocurrency Transactions
June 14, 2022
The double-entry accounting method has been a standard for bookkeeping literally for centuries. However, it may be completely outdated for the world of cryptocurrency and blockchain Transactions.
In “double-entry” bookkeeping, every transaction is recorded in two different accounts: a debit to one account and a credit to another.
For example, example, if a business takes out a $5000 loan, assets are credited $5000, and liability is debited $5000. The $5000 is both an increase in cash and an outstanding debt.
While double-entry accounting serves as one of the most important accounting systems in the profession today, it is limited in its reliability and assurance, especially as it comes to digital currency and blockchain technology. Some of the negative limitations of double-entry accounting are; the ledgers can be easily manipulated and changed, adjustments are based on personal judgment and human error, and it may be difficult to locate an error when amounts are incorrectly recorded.
Triple-entry accounting, on the other hand, is an accounting method for which a third element is added to the debit and credit accounting system.
The term triple-entry accounting is somewhat misleading as it’s not an actual third entry that is being created, but a third component known as “blockchain.”
Originally created to support bitcoin and other cryptocurrencies, blockchain is a decentralized, shared ledger of financial transactions. Each block is composed of separate transaction batches forming a continuous, sequential chain in a data structure.
Unlike more traditional accounting methods, transactions, contracts, assets, and other business data accumulate and post to individual blocks, and once the blocks are “full,” they are added to the chain in sequential order.
By simultaneously adding a third entry and then posting it to a shared ledger visible to all with permitted access, blockchain is poised to enhance all accounting processes, improve data storage, and will greatly reduce errors and fraud by creating an audit trail for every aspect of a transaction.
How AbitOs Can Help
Blockchain and cryptocurrency transactions present a new set of challenges for businesses that accept bitcoin and other cryptocurrencies in exchange for goods or services.
Triple-entry accounting presents a framework for a new way to do accounting that is more in step with the complexities of blockchain. As cryptocurrencies become more the norm in business transactions, and as the IRS is constantly evolving new attitudes toward crypto, it is incumbent on all businesses to be sure that they are handling and accounting for all cryptocurrency and blockchain transactions property.
We would be happy to take a look at your bookkeeping methods and come make sure that your records will reflect that you are in full compliance with current US tax law as regards cryptocurrency transactions.
AbitOs specializes in the unique accounting needs of high net-worth individuals with international lifestyles, LATAM, Canadian, and other non-US entities doing business in the US, as well as US entities doing business in those countries and across the globe. Adapting traditional accounting methods to blockchain and cryptocurrency transactions can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Alert, do not hesitate to contact us.