Triple Entry Accounting and Shared Ledgers

This blog post summarizes information related to what many people refer to as "triple-entry accounting" (TEA), "triple-entry bookkeeping" (TEB), shared public ledgers, public databases, and such.

First, it is important to understand the difference between recordkeeping, bookkeeping, and accounting which is:

  • Recordkeeping: Recordkeeping relates to the mechanical process of preservation of documentary evidence of a particular event.
  • Bookkeeping:  Bookkeeping is a specialized type of recordkeeping which relates to the mechanical process of preserving documentary evidence of particular business events in the form of financial transactions into a bookkeeping system.
  • Accounting: Accounting builds on top of bookkeeping adding additional refinements of financial summarization and a control function added. Accounting is the language used by bookkeeping. Accounting is a communications tool. Accounting is a classification system.

The "book" in bookkeeping relates to the initial recording of raw data of a financial transaction into what is called a "journal" sequentially.

Accounting records are different from bookkeeping records in that in accounting, information about financial transactions are recorded for the purpose of analysis rather than just sequentially.  In accounting, financial transactions are classified so that the resulting record shows information that is meaningful to the life of an economic entity.  Accounting facilitates decision-making, regulatory compliance, and financial reporting. 

And so, the accounting process takes the information of the journal and posts it in a second book, where information is organized in a manner that enables analysis. This book is known as ledger. And therefore; accounting happens in ledgers, whereas bookkeeping happens in journals.

Second, it is important to understand the distinction between single entry, double entry, and triple entry recordkeeping systems:

  • Single-entry bookkeeping: Single-entry bookkeeping is a basic type of recordkeeping that simply uses one list to record information about business events in the form of financial transactions. Single-entry bookkeeping is how the typical person performs financial recordkeeping.
  • Double-entry bookkeeping: Double-entry bookkeeping uses two synchronized lists (a.k.a. ledger) to perform recordkeeping with a clear strategy to identify errors and  proactively remove errors from the system. A side affect of this system is that unintended errors (i.e. accidents) can be distinguished from intended errors (i.e. fraud). This then leads to an audit strategy. Double-entry is how professional accountants perform recordkeeping.
  • Triple-entry bookkeeping: Triple-entry bookkeeping (TEB) builds on top of double-entry bookkeeping by adding a third synchronized ledger. In that triple-entry bookkeeping, financial transaction from two double-entry ledgers are linked and  the link is publicly available for all to see certain specific aspects of a financial transaction (i.e. other aspects of the financial transaction remain private).  It would be illogical for the transaction to not be reflected the same in both ledgers. But triple-entry bookkeeping systems (TEB) simply record transactions in a triple-entry fashion using a distributed ledger.
  • Triple-entry accounting: Triple-entry accounting (TEA) builds on top of triple-entry bookkeeping (TEB) by not simply just sequentially storing transactions; but also classifying and interpreting financial transactions, facilitating decision making, performing financial analysis and forecasting, performing tax planning, and facilitating internal management/cost reporting or external financial compliance reporting. In addition, triple-entry accounting might serve as a subledger for each of both parties to a transaction’s general ledger information.
Triple-entry bookkeeping and triple-entry accounting enables the creation of an economy wide or supply chain wide accounting system or interlocking accounting systems.  With traditional double-entry bookkeeping, accountants effectively act as "data janitors" fixing problems, "transaction chasers" tracking things down, and when everything else fails accountants use what is know as a "plug" to fix problems like the system getting out of balance.  Accountants spend a lot of time "reconciling" things to see if they agree and then fixing problems they discover.  Triple-entry bookkeeping and accounting are different in that it fixes the system, eliminating the possibility of many problems (i.e. it does not solve all problems) from ever even occurring. For example, having to "reconcile" things never has to happen because the system is built to make sure the system does not get out of balance.

While triple-entry bookkeeping and accounting relate to financial accounting and reporting, the notion of a shared ledger system (a.k.a. distributed ledger) is more general and can be used in other areas of accountancy such as internal management and cost reporting or taxes or even more generally and use cases completely outside of financial accounting and reporting. The video, Sharing Ledgers for Sharing Economies, explains shared ledgers in detail.

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