The Friction Companies Face with Accounts Payable and How the Blockchain Will Solve It

Technological developments taking place across a number of industries are revolutionizing businesses for the better. Consider the cloud database platforms or the robotic process automation for routine jobs. These new technologies will significantly transform a number of servicing and manufacturing industries.

One new technology that is receiving a lot of attention is the blockchain. Google trends show that blockchain or platforms built on this technology were some of the most searched terms in 2017. The peer-to-peer network is considered very useful for record keeping in particular.

Blockchain Benefits for Accounting
Blockchain is a digital database where records of transactions between multiple parties are kept in a ledger. New transactions are recorded to the ledger in the form of blocks. Each new block contains a time stamp linked to a previous block which creates a chain.

The business function of accounting can be significantly improved by the blockchain technology. Accounting and auditing are based upon looking back at the historical records of transactions. Blockchain’s core features of immutability, security, real-time processing and public accessibility would make business accounts more transparent and trustworthy.

Problems with the Current System of Accounts Payable
The traditional way of creating and settling accounts payable involves sending a single document to the recipient which is only visible to one party at a time. The second party can only make update to their records after the first party has completed their work.

This adds delays and slows down the whole process. Furthermore, each party must also dedicate human resources to monitoring the issuance of invoices, create payable accounts and update these records as payments are made.
The process requires time, resources and personnel. It is also prone to human error, which can take further time to get the records corrected.

Blockchain Based Smart Contracts
The process of monitoring and record keeping of Accounts Payable can be completed instantly by implementing smart contracts built on blockchain. These contracts would also remove the need for accountants to ensure that proper entries are made each time.

Let’s consider a simple example to understand how smart contracts work. Let’s suppose that a business acquires cleaning services from another firm for the three months of January to March. The cleaning service starts in January and the business receives a bill for the month’s services. The accountant would create separate accounts for expense and payable to make a note of the obligation.

The business continues to receive cleaning services in February and receives another bill for the month. The accounts department makes a full payment for the services at the end of February. The accountant would need to settle the Accounts payable for two months and create a new record of prepaid expenses for March.

Practical Application of Blockchain for Accounts Payable
For a business that deals with hundreds of such service providers, it could take a lot of time to record expenses and create separate heads for payable accounts.

At Calero.io, Smart contracts would automatically execute these transactions at each stage of service completion to the correct account. What’s more, the creation and settlement of the account would be recorded for both the servicing business as well as the client. This would completely remove ambiguity and chance of a dispute.
The blockchain ledger is designed to maintain a full record of all the entries made on the platform. In the example posted above, accountants from both the business and cleaning service would be able to review the transactions and check for any errors.

A blockchain network remains online 24/7. Any party with access control can check the record at any time. Access to the system can also be given to external regulators such as audit firms and tax authorities. These agencies can check the ledger for accuracy to ensure compliance with accounting practices.

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