Database technology may eliminate the need for double-entry accounting

Some people believe database technology may eliminate the need for double-entry accounting. This creates three possibilities:

(1) the double-entry model will be abandoned

(2) the double-entry model will not be used directly, but an external-level schema based on the double-entry model will be defined for accountants’ use, or

(3) the double-entry model will be retained in database systems.

Which alternative do you think is most likely to occur? Why?

Double entry accounting systems have existed arguable since the 7th centuries among early Muslims to record their charitable giving requirements. Accounting is an abstract means to record resources and the activities that decrease or increase them within an organization. The double-entry accounting system’s primary benefit is its self-checking nature; for every action in one account, there must be an equal but opposite effect in another account. This allows for comprehensive record keeping with auditability. Double-entry accounting also allows for accrual based accounting which properly accounts for credit – something that single entry accounting cannot handle as well.

Proponents who claim that database systems make double-entry accounting obsolete are ignoring fundamental rules in accounting that have existed since its inception, unless they are suggesting an entirely new framework for accounting not based on single or double-entry. This is hard to imagine, but there was a time when double-entry accounting may have been inconceivable as well. The obsolescence of double entry accounting would also imply the obsolescence of certain financial statements as these statements of accounts rely on double entry accounting for usefulness. The main issue is being able to trace the movement of resources of an organization without making equal and balanced entries. When a payment is made for inventory, simply recording two transactions without making the obvious linkage to the two accounts seems imperceptible. For this reason, databases will continue to use the double-entry accounting system even in abstraction for user purposes.

With the advent of database technologies, the fundamental rules of accounting currently cannot be ignored or eliminated and most current technologies comply with double-entry accounting. Interestingly enough, even the newest technologies in the finance world, cryptocurrencies,use double entry bookkeeping principles to maintain information on the flow of these digital assets. The underlying technology of cryptocurrencies is the blockchain, which features a distributed ledger of transactions  utilizing the principles of double entry accounting to maintain the validity and veracity of transactions. The distributed attribute means that the ledger is duplicated and copied across the bitcoin network. This is opposed to a centralized ledger where security issues among other issues could be degraded. So even the latest advances in financial asset management require double entry accounting and there is no reason to believe it will become obsolete.

References

Barber S., Boyen X., Shi E., Uzun E. (2012) Bitter to Better — How to Make Bitcoin a Better Currency. In: Keromytis A.D. (eds) Financial Cryptography and Data Security. FC 2012. Lecture Notes in Computer Science, vol 7397. Springer, Berlin, Heidelberg

(03/2012). Intermediate Accounting Chapters 1 – 7, 7th Edition. [Bookshelf Online]. Retrieved from https://bookshelf.vitalsource.com/#/books/125989343X/