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Triple Entry Accounting

From rudimentary records of animal and food stock in the Sumerian era to complex modern-day records of business transactions, accounting has come a long way. Ever since the double entry system of accounting replaced the inherently flawed single entry system, it has been uniformly followed by individuals and organizations all over the world. While the single entry system raised intra-organisational trust issues, the double entry system raised external stakeholder trust issues. Even today, the transparency and authenticity of accounting data is a big question when it comes to multinational companies. As managers oversee the books of accounts internally and independently, external auditors are required to verify the integrity of the accounting information. Not only does this make the process extremely costly, but it also makes it incredibly time-consuming. Even so, frauds by employees and owners are not unknown to the world. Not to mention the huge question plaguing our minds- are auditors truly working for the public, or for the companies that pay them?

According to a report by the Association of Certified Fraud Examiners (ACFE), global fraud loss in 2017 was estimated to be around US$ 4 trillion, and only 4% of the occupational frauds were identified by external auditors. Further, in the ACFE’s 2020 ‘Report to the Nations’, it was assessed that a typical fraud lasted 14 months before it was detected, and caused a median loss of US$ 8,300 per month. This shows that the prevailing accounting and auditing system has only been moderately successful in the prevention and detection of fraud. Although unconventional, there exists an all too practical solution to these obstacles in the form of an accounting system utilizing a certain decentralized technology, i.e. blockchain technology.

While blockchain technology is most well-known for its application in the cryptocurrency market, several other industries are increasingly modifying their existing frameworks to leverage this technology and render better and more efficient services. Simplistically, blockchains are decentralized databases that are copied to all the participant computers (validators or nodes) in a participating network, which require no central authority to administer their functioning. In the case of the Accounting and Finance sector, blockchain technology promises to fundamentally improve accounting, and introduce a novel level of security, trust, and transparency, never seen before. But how does this technology propose to do something that centuries of legal, social, economic, financial, and political changes couldn’t ensure? Moreover, is it truly feasible?

First proposed theoretically by Yuji Ijiri in 1986, the triple entry system of accounting originally provided for a third ‘trebit’ entry, which would explain the changes of income with a new set of accounts. However, Ijiri’s version of the system was widely criticized for being difficult to implement, being likely to create disputes, and for ‘lacking a use case’. However, recently popularized in a research paper by Ian Grigg, a financial cryptographer, the system has taken a completely different road by being associated with blockchain technology. Building on a new principle, “the receipt is the entry”, triple entry accounting aims to utilize the best of both double entry accounting and blockchain technology to overcome the obstacles hitherto faced.

By employing consensus mechanisms and smart contracts, which are fundamental to the nature of blockchain technology, triple entry accounting not only ensures that all participants have utmost clarity about the status of the transactions; but also minimizes the risks of errors and frauds in the system. According to the ICAEW, “Blockchain has the potential to enhance the accounting profession by reducing the costs of maintaining and reconciling ledgers, and providing absolute certainty over the ownership and history of assets”. What this essentially means, is a greater level of transparency and public trust in the long run.

The system seeks to fundamentally improve accounting by making use of a signed receipt, backed up by financial cryptography. Apart from recording the debit and credit aspects of the transaction, an entry would also be made on a blockchain, in the form of a signed receipt. These receipts would contain information about the parties involved, the product, the date and time of the transaction, the amount of the transaction, as well as their digital signatures. Additionally, a signed contract of issuance known as the ‘Ricardian Contract’ would also be bound into the receipt. More or less digital versions of smart contracts, Ricardian Contracts, introduced by Ian Grigg, are human-readable legal agreements that get converted into machine-readable contracts once agreed upon and signed by the parties involved. Essentially, this system of accounting would overcome the limitations of the double entry system of accounting by ensuring that all the parties hold the same common cryptographically backed record of each event. Not only does this make each party incapable of altering data, but also dramatically reduces problems caused by differences in information.

While this proposition suggests the blockchain-based signed receipt to be a piece of additional common evidence accessible to the parties involved, it could eventually replace the need for maintaining individual books of accounts by taking the form of a single, large, common ledger. In the words of the ICAEW, “by lowering the walls around each company’s internal accounting and making entries directly on the blockchain, the bookkeeping allows for the transactions to be recorded faithfully, verifiably, and identically by each party”. Instead of recording entries on independent ledgers, the parties could record it on one big, decentralized, public, blockchain-based ledger, which could pave the way for a completely new methodology of accounting. Ian Grigg once said, “It’s tough to lie when everybody is watching”. As the entries would be made on immutable, decentralized ledgers, there would be next to little or no scope left for forgery. In fact, in his research paper, Grigg even goes as far as saying that the mutual fund scandal of 2003 would have shown a clear audit trail had the system been in place then.

Once implemented, this system could potentially reduce tax evasion on part of companies and individuals; and even ensure better administration on part of the government. The auditors, too, would immeasurably benefit, as this system would bring as its consequence the self-verification of accounting data. This would allow auditors to focus their attention on issues that are more judgement sensitive, rather than spending their time and effort on verifying the authenticity of transactions. Nonetheless, though the world stands to gain enormously through the implementation of this system, certain constraints need to be overcome before its potential can be truly exploited. Presently, companies are not in favor of revealing all their data on common ledgers, as they may contain important strategies, which are crucial to their success. Moreover, owing to the blockchain trilemma, most blockchains are not able to achieve all of the three desirable traits, namely, security, decentralization, and scalability. Further, currently, the block time, i.e., the time taken to add a new block makes it impractical to record a large number of transactions at once on a common ledger.

However, with ledgers like zkLedger, which utilizes zero-knowledge proof, a method by which a user can prove to another user the knowledge of a certain value; without actually conveying any extra information, the privacy concerns of companies can soon be overcome. Additionally, by exploiting new consensus mechanisms like proof of history (PoH), which solves the blockchain trilemma by utilizing synchronized clocks to ensure clarity about the sequence of events; even the block time can be reduced to as little as 0.4 seconds per transaction.

Having tremendous potential to change the fundamentals of the backbone of the economy, blockchain technology is set to shapeshift the working of the accounting sector in the near future. With companies like Ledgerium and blockchain platforms like Pacio solution, Balanc3, Request Network, and many more coming into play, the blockchain revolution in the accounting sector seems to be getting nearer and nearer. Though triple entry accounting does suffer from its fair share of time-sensitive obstacles, with rapid technological advancement, these are soon to be tales of the past. With more and more users entering the network, it may be safe to say that it will soon be known and used by auditors, companies, accountants, and the general public all over the world. “The question no longer remains ‘if’, but has now changed to ‘when and how’”.

Harini K. Desai Writing Mentorship, 2021


1. Triple entry Accounting- Research paper by Ian Grigg (2005): 2. Bitcoin Magazine- Triple Entry Accounting: 3. Ricardian Contacts: 4. Blockchain Technology- A game changer in accounting? Research paper by Deloitte (2016): 5. Triple entry accounting with blockchain. How far have we come?- Research paper by Cynthia Weiyi Cai (2021): 6. Triple entry accounting system- A revolution with blockchain: 7. Accounting, Auditing and Blockchain. The common thread that binds the 3 is Triple Entry Accounting: 8. Blockchain and the future of Accountancy- Research paper by ICAEW (2018): 9. Investopedia: 10. Blockchain Scalability Trilemma: 11. Report to the Nations- ACFE (2020): 12. Ledgerium: 12. zkledger: 13. Pacio:
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