While double-entry and triple entry accounting are two methods of recording financial transactions, they are pretty different accounting techniques. A solid accounting system is essential for the smooth operation of a business and the organization of financial records.
Even when numerous accounting systems are available to choose from, the double accounting methods have remained in use for decades. Whereas, the implementation of triple-entry accounting started to gain traction in recent years. However, many business owners still tend to get confused between the two when they plan to opt for finance and accounting outsourcing.
Understanding double-entry accounting system
The double-entry system was first proposed in the 13th century, even though accounting practices remained for centuries. Double-entry accounting is a method of documenting financial transactions that involve two accounts for each transaction.
Double-entry accounting, invented by Luca Pacioli in 1494, is a scientific method of keeping financial records based on the duality principle. Every transaction impacts two accounts at the same time. One account receives a credit, while the other receives- a debit.
Because of the dual effect, the double-entry system is precise and thorough. It adheres to generally accepted accounting principles where every transaction gets tracked by a comprehensive interface. The process starts with the source documents, then moves on to the ledger, journal, trial balance, and finally- financial statement preparation.
Since this system performs an out-and-out recording of financial transactions, there is less risk of embezzlement and fraud. As a result of the dual element, unintentional mistakes can be easily identified, and accounts can be adjusted to correct them.
Top benefits of double-entry accounting
1. Reduces errors
The financial position of a company can be distorted- by human error. However, due to the checks and balances provided by double-entry bookkeeping, this is less likely. Because the debit and credit amounts are equal in double-entry bookkeeping, errors are easily detected. Although errors- are reduced, they did not get eliminated.
2. Creates a paper trail
By leaving an audit trail, double-entry bookkeeping reduces theft. You can use audit trails to track transactions that get posted to the general ledger. If your cash balance appears to be excessively high on your balance sheet, you can investigate the transactions made to the cash account to see if they are correct.
3. Preparing financial statements
Because information is collected directly from the double-entry bookkeeping transactions, accounting information in companies that use double-entry bookkeeping is simple to prepare. Businesses must produce accurate financial statements in a timely and efficient manner. Financial statements are used by management to determine how well their companies are performing financially and to create budgets.
Understanding triple-entry accounting system
The 3E Accounting System is a scholarly concept that provides the framework for a new way to do accounting called triple entry accounting (or 3E). After being introduced as a concept- in the 1980s, it gained traction when Ian Grigg linked it to blockchain technology.
Most of the issues that are not included by double-entry accounting get dealt with in this method. A reliable and accurate accounting system, it’s a high-level accounting system. Triple entry accounting involves cryptographically securing all parties involved in the accounting process and linking them via a smart contract to a third entry.
Lastly, the third entry in the Triple Entry System is both a transaction and an invoice, which gets entered into the Blockchain. Along with each party having a receipt, it’s proof of a transaction between the two parties -using the double-entry system.
Triple-entry accounting records are cryptographically enclosed and distributed, making them nearly impossible to destroy or copy. For every dollar spent, a buyer records a credit in the account. Whilst sellers record cash receipts as a debit on two different accounting books.
Blockchain technology solves this problem by recording entries in the same shared database as a transfer between wallet addresses, which creates an interconnected network of permanent and objective accounting records instead of recording them separately in different journals. Integrity, auditing, and transparency are just a few of the advantages of a 3E accounting system.
Top benefits of triple-entry accounting
1. Distributed control
The jurisdiction no longer rests on one hand as the data is transferred to all related hosts. As a result, data is consistent and reliable across companies because everyone has equal access to it.
Because the data remains connected to all the associated companies, the chances of a mistake or misunderstanding between two parties- are reduced. As a result, data entry is more accurate and less prone to errors and omissions.
3. Electronic contracts
The electronic contract software is programmed to work when all of the required details are fulfilled. As a result, related actions, such as payments, are only carried out automatically when a corresponding trigger approves them. Eventually, more double-data-entry systems will get converted to triple-entry accounting, a much more reliable and advanced technology.
Comparison between double-entry v/s triple entry accounting
Every financial transaction gets recorded in two separate accounts, a debit to one account and a credit to another. When it comes to virtual currency and blockchain-based, double-entry is one of the most crucial accounting systems today, but it’s also one of the least reliable.
The ledgers can be easily deceived and changed since the adjustments are based on personal judgment, and human error may be hard to locate when payments get incorrectly recorded. This adds a third element to the debit-and-credit accounting system in triple-entry accounting. However, there is a slight misconception in this term as it does not create a third entry.
Instead, it adds a third component known as the Bitcoin network with foundational “blockchain” technology to the double-entry accounting to link every element of a transaction and primarily seal it (the third entry), so it can never get altered or deleted again.
By utilizing this technology, the accounting standard will become revolutionized with a real-time ledger established. It significantly reduces errors and frauds thus, making an audit trail for every aspect of a transaction.
This ground-breaking blockchain technology will safeguard information and communications in the accounting process while also ensuring complete transparency throughout the accounting and auditing processes.
The Bottom Line
To sum up, we can say that both double and triple entry accounting comes with its set of benefits and limitations. Nevertheless, due to its advanced blockchain technology, triple-entry accounting is gaining popularity amongst businesses. However, many companies and tax firms still do not fully understand its application and opt for finance and accounting outsourcing to streamline their finances and business accounting.
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CapActix is a prominent name that provides high-grade accounting outsourcing services, given the immense industry expertise and vast pool of proficient CPAs and accountants. To know more about our services, visit https://www.capactix.com/.