How Does Triple Entry Accounting System Secure Your Business? (Explained With Illustrations)
Triple entry accounting system is a new form of bookkeeping that emerged as an alternative to double-entry system. The triple entry system works by the logging of three entries during a transaction. The credit entry, debit entry, and an additional entry of receipt. The third entry assures credibility to the transaction thereby securing the financial operations.
The advent of digital record keeping has necessitated proof of work due to its easy data tampering vulnerability. While double entry system allows the parties to record entries separately in the ledger, the triple entry system introduces a common ledger between the parties. This creates transparency in the transactions, vouch for reliability, and enhances trust between the participants.
Let’s see how triple entry system secure your business by introducing a receipt. Before that look at the working of double entry system and it’s faulty nature.
Working of Double Entry System
Let us consider a payment transaction between Alice and Bob
Bob gives a payment of $100 to Alice. Both of them record the entries in their separate ledgers as below. Bob records in his books the debited amount of $100 in Alice’s account. At the same time, Alice records the credited amount of $100 in Bob’s account to her books.
While returning the money, Alice debit Bob’s account as $100, and the closing balance becomes $0. Simultaneously, after receiving the money, Bob records the credit amount of $100 in Alice’s account. This makes the closing balance of Bob’s book $0 and the account is closed.
This is an ideal scenario during a transaction in a double entry system. Though, the double entry system is more prone to errors, loopholes and fraudulent activities. Let’s look at the same scenario but with a common flaw that happens with double entry system.
Error in Double Entry System
Here, while giving the money, Bob records $100 correctly in his books while Alice misses a zero and enter it as $10. Now, during the repayment, Alice gives $10 and closes Bob’s Account. However, as Bob received only $10 instead of $100, Alice’s Account in Bob’s book will still show a remaining balance of $90.
This is one of the common errors that happen in a double entry system. Here, a minor error or deliberate tampering of the record could result in a mishap in the ledgers. Records also can be fairly easily falsified under a double-entry system.
Discrepancies may be found eventually through painstaking auditing, but the process is difficult, time-consuming, and far from foolproof. This also leads to distrust between the parties and results in hostile relations.
The reason of these errors is that the ledgers are recorded independently by the parties. Here arises the necessity of a common ledger through which any error or discrepancy can be found out and resolved easily. This is when we introduce a receipt between the parties. This element of receipt or proof of work converts the double entry system to the triple entry system.
Working of Triple Entry System
Learn How Triple Entry System Solves The Error In Double Entry System
As given in the figure below, in a triple entry system, when Bob pays the money to Alice, the data is recorded in the separate ledgers as well as the public ledger. Bob records $100 in his books, simultaneously the data gets recorded in the public ledger.
Alice who can also access this common ledger cannot alter any data in the record as it is immutable. While she records her repayment of $100 in the receipt, Bob sees it, approves it and sign it.
The receipt or the distributed ledger introduced between the parties act as the proof of work. It is accessible by both of them and authenticates the transaction. As a result, the parties can find any errors that is associated with the occurrence and resolve it seamlessly. This in turn makes the business secure, transparent and keeps the trust between parties intact.
With the application of Blockchain technology, the issuing of receipt also makes the ledger immutable. Once the data is entered in the blockchain, it cannot be tampered, manipulated or altered. Unlike double entry system, it reduces administrative costs, and saves a lot of time.
We just saw how this third entry automatically validates the transaction and make it secure, immutable, and transparent.
It is quite surprising that still many people still stick on to the age-old double entry system which can easily cause errors and frauds in the financial matters. It’s high time that businesses adopt a reliable triple entry system to secure their businesses.