Blockchain Gap: Double Entry Model

Almost everyone knows that accounting deals with debits and credits; but many fewer people know what the purpose of those are.  The purpose of a ledger was to show a position as of a point in time–and it does this through the use of balances.  Balances show how things stand at some particular point.

But a ledger is not a static thing.  It changes all the time (or at least the business owner hopes it does!) as activity is recorded.  If all the activity were recorded in only one way, like the production of finished good or the payments to vendor, balances would accumulate endlessly, and never get smaller.

Double entry means that each business event has what McCarthy has termed “Duality,” two impacts.  The result of this is that there is a flow into and out of all accounts–or there should be if the accounting model is correct.  The payment to vendors not only decreases the outstanding bills, it decreases cash; the production of finished goods not only increases inventory on hand, it recognizes the consumption of raw materials.

Most blockchain applications today ignore this historical aspect of a ledger; in other words they don’t solve the total problem today’s ledgers typically solve.  This is a gap in blockchain.  It can be rectified–the technology doesn’t preclude doing this.  But the technology and configuration of it would have to be enhanced to do so.

This is Episode 143 of Conversation with Kip, the best Financial Systems Vlog there is. Literally learn more–about ledgers and financial systems–at Financial Systems Education.com.

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