A Journey of Triple-Entry Accounting

1. Introduction

The history of accounting is thousands of year old, and it can trace from the ancient civilisations. Luca Pacioli (1494) is known as the father of modern double-entry accounting system. Accounting continuously has developed according to the requirements of the business. Due to increase complexity in economic transactions, some specialised branches (such as Cost Accounting, Financial Accounting, Management Accounting) of accounting have developed. People were doing accounting centuries before computers, at that time accountant used paper-based ledger books or registers to record transactions. Machines started to play a role in the 1800s, and then the invention of computers transformed accounting.

After the development of the internet and informatics, the way business entities operate has changed these days. As a result, the cloud accounting and other modern accounting methods emerged, but the double-entry accounting principle always is base for these methods. Yuji Ijiri was the first person who thought ahead of double-entry accounting.

In 1975, he introduced a new concept in accounting that is called momentum accounting. Ijiri originally coined the term ‘triple-entry’ in 1982. He proposed that in addition to the debit and credit entries, the third layer of entries called trebit should be included with a new set of accounts to explain changes of income. The idea of such a ‘triple-entry bookkeeping’ system is to provide more momentum financial information to the organisation, enabling better strategic decision making.

Ijiri’s ideas were forgotten (Ibañez et al., 2020). In 2005, Ian Grigg published a working paper on his website titled ‘Triple-entry accounting’. He gave a different meaning to this term from Ijiri’s momentum accounting definition. Grigg proposed a new concept, ‘the receipt is the transaction’, wherein a digitally signed receipt backed up by financial cryptograph between two parties can be viewed by a shared third entry to avoid transaction fraud and reduce redundancies in the internal recording. Most of the recent studies believe in this story.

Still, this story gives an incomplete presentation of the historical development due to under-appreciation of the work of William McCarthy and Todd Boyle. To fill this gap, we conduct an exploratory study on the development of triple-entry accounting concept from its early form to its present incarnation with blockchain technology. Some of the important milestones in the development of triple-entry accounting concept has been shown in Figure 1.

This paper structured in the following manner: Firstly, we discuss the work of Yuji Ijiri, William E. McCarthy, Todd Boyle, and Ian Grigg. Next, we discuss the present incarnation of triple-entry accounting with blockchain technology. Finally, we conclude with some general considerations.

Figure 1: Important Milestones in the Development of Triple-Entry Accounting Concept (1975–2020)

2. Triple-Entry Bookkeeping by Yuji Ijiri

Yuji Ijiri is the first person who thought beyond the principle of double-entry accounting. In 1975, Ijiri came up with the idea of momentum accounting. The term triple-entry bookkeeping originates from a paper written in 1982 by Professor Yuji Ijiri. This paper entitled “Triple-entry bookkeeping and momentum Income” which further elaborated its corresponding framework in his paper entitled “A framework for Triple-entry bookkeeping” in 1986.

Ijiri (1986) argued that the double-entry records the changes in wealth through the income earned during a period, but it might be possible that every one-dollar income is earned at a different rate. He referred to the definition of momentum, ‘the rate at which income is earned’, which is measured in monetary units per period, such as dollars per month (Cai, 2019). To record the changes in momentum, he also developed a third-level entry for a new set of trebit accounts.

Fundamentally, Yuji’s work extended the accounting equations from two layers to three layers, coinciding with the derivative/integration concept in mathematics as follows:

Ijiri (1986) triple-entry accounting explains how accounting information can facilitate the decision making of internal management. His work is intellectually engaging but its real implementation is very difficult that’s why his work has been strongly criticised. This framework is not currently being used. However, “Whether or not it is worth pursuing this alternative accounting method is still open to debate” (Cai, 2019).

3. Resource-Event-Agent (REA) by William E. McCarthy

Almost simultaneously with Yuji Ijiri, William E. McCarthy proposed a generalised accounting model that contained the concepts of Resources, Events, Agents (REA) (McCarthy, 1982). REA is a model of how an accounting system could be re-engineered for the computer age. Note that this system was at the antipodes of Ijiri’s work to broaden the concepts of double-entry accounting, but it still took some insights from the early work of Ijiri (Ibañez et al., 2020).

McCarthy system would not have debits, credits, and accounts because he deemed inessential for an accounting system. He argued for recording detailed transaction histories which may be viewed by a different class of users. REA treats the accounting system as a virtual representation of the real business. In other words, it creates computer objects that represent real-world-business objects directly. REA is an ontology in the computer science context.

The actual items included in the REA model are as following:

• Resources – goods, services or money
• Events – business transactions or agreements that affect resources
• Agent – people or other human agencies (other companies, firms, etc.)

Due to the absence of granularity in the data processed, McCarthy criticised conventional double-entry systems. He proposed that this will be solved by the REA accounting model, more effective and precise, and describe the agents involved, as well as other information while maintaining the duality of economic activities (Causal relationship). Later in his criticism, the absence of automation is also included.

4. GL Dialtone and Triple-Entry Accounting by Todd Boyle

Todd Boyle is an American accountant, moved back from Japan in 1997 and set up his company General Ledger (GL) Dialtone in Seattle. GL Dialtone is an accounting solution company specialised in webledgers. He started work with his idea of shared ledger independently. One of McCarthy’s collaborators, Robert Haugen¹, later influenced him (Ibañez et al., 2020). Haugen introduced Boyle to McCarthy’s REA, and later with McCarthy himself, which had an impact in Boyle’s ideas (Ibañez et al., 2020).

Boyle believed that McCarthy’s work was very high level and ahead of its time. His webledger architecture implemented McCarthy’s economic ontology, and ISO 15944-4² and form “Shared Transaction Repository” (STR) or “Public Transaction Repository” (PTR) based on “single-entry hosted transaction tables”. “There would thus be a single, shared, network-centric record but, because of the triple-signed structure, the system would be called triple-entry accounting” (Ibañez et al., 2020). He developed an REA-based economic ontology to describe this system conceptually.

5. Triple Entry Accounting by Ian Grigg

Ian Grigg is a renowned financial cryptographer who has been active in this area since 1995. He developed Ricardian Contract³ with Gray Howland in 1996. Grigg continuously developed this idea and began to document his work in 2000. Around 2004, he realised that his design could have fundamental implications for accounting, and he pursued further development of his ideas, which he called Triple-Entry Accounting.

This concept, which Grigg later continued to develop, It was an effort to replicate how, in a shared data environment within firms, economic activities are reported internally within firms via an ERP framework (Ibañez et al., 2020). It involved a shared receipt for the transactions common to two parties, and a trusted third party limited to signing, timestamping and ordering. It originated the genesis of triple-entry. It is not just a receipt, but it is a transaction itself because it holds all the relevant information.

An important point to note that at the time of conceptualising his ideas, he was unware of Boyle’s work. The draft of the resulting paper was circulated in June 2005. Boyle saw this paper and found both of them were working on the same idea, so he commented on Grigg’s paper. Inside his article, Grigg incorporated and implemented many of Boyle’s ideas (Ibañez et al., 2020). However, he credited Boyle as an author in his draft, but this was later withdrawn at Boyle’s request due to wider differences between their views.

Grigg proposed a solution to deal with accidental errors and fraud in accounting. He believes that companies should not be the sole recorders of business transactions. A third-party, cryptographically secured entry can record for transactions between entities at the same time. In this third entry, the debit registered by one entity is the credit recorded by the counterparty. Initially, this idea is known as triple-entry accounting, but later he pointed out that were triple-entry bookkeeping (Grigg, 2019). Grigg linked the standard accounting techniques with financial cryptography in the form of the signed receipt. In consequence, a more resilient system which will reduce costs and providing reliable accounting is being formed.

6. Blockchain Technology based Triple-Entry Accounting

In 2005, Ian Grigg proposed a great concept to record business transactions. At that time, it was unclear who would act as the neutral, trusted third party to maintain the shared ledger. With the emergence of Bitcoin and its underlying blockchain protocol showed that a neutral trusted third party could be replaced by blockchain so the third shared ledger can be decentralised, immutable, secure and automated using blockchain (Ibañez et al., 2020).

In 2014, Jason Tyra in his short article suggesting that using Bitcoin infrastructure, triple-entry accounting concept proposed by Grigg (2005) is possible and likely to be highly desirable for both companies and their stakeholders (Tyra, 2014). Since then, discussion on blockchain technology-based triple-entry accounting has been started. Despite the potential of triple-entry accounting framework in accounting, there is a limited amount of study done in the academic world (Cai, 2019). Some of the well-cited studies are as follows:

• Dai & Vasarhelyi (2017) proposed a blockchain technology-based accounting system, and this study incorporates ERP and blockchain technology.
• Wang & Kogan (2018) introduced a blockchain technology-based AIS (Accounting Information System), including a prototype implementation. The main concern addressed in their paper is the tension between the protection of private data and the desirable public blockchain transparency. The authors solve the tension using Zero-Knowledge Proof encryption.
• Weigand et al. (2020) introduced a blockchain technology-based shared ledger solution formally and compliant with Financial Reporting Standards. They build on the COFRIS accounting ontology (grounded on UFO) and the blockchain ontology developed by De Kruijff & Weigand that distinguishes between a Datalogical level, an Infological and an Essential (conceptual) level. This study shows how both consensual and enterprise-specific parts of the business exchange transaction can be represented concisely and how this pattern can be implemented using Smart Contracts.
• Also there was an article in HBR titled “The blockchain will do to financial system, what internet did to media” by Jiochi Ito, Neha Narula and Robleh Ali, where they clearly mentioned that the financial system is ripe for disruption and with blockchain we will see a lot of impact in the near future.

Prominent players of the accounting industry move much faster than academia (Karajovic et al., 2019). Several start-up projects such as Request Network, Balanc3, Fizcal, bBiller, Ledgerium, zkLedger, and Pacio have been established to implement the concept of triple-entry accounting.

7. Discussion and Conclusion

From the above discussion, we can say that triple-entry accounting has two schools of thought: (i) Yuji Ijiri Momentum Accounting, and (ii) William McCarthy REA ontology. Ijiri Momentum Accounting, since it was affected by the physical elements of force and momentum, its fundamental objective was to transfer the focus of management to a company’s future growth rather than the current situation (Gröblacher & Mizdraković, 2019). At present day, it remains subject to researchers’ concerns. Indeed, the structural similarities between REA and TEA are not only a coincidence but a natural outcome, given the historical effect of the former on the latter (Ibañez et al., 2020).

We found that most of the work on TEA, going on these days, followed the McCarthy REA school of thought. Todd Boyle had given a new dimension to REA ontology, and with the help of Boyle ideas, Ian Grigg had given the concept of the triple-entry accounting. But at that time its implementation was not possible. With the emergence of blockchain technology, it seems that its application has become possible. The industry has already seen the promising potential of blockchain technology-based accounting. Blockchain Technology based triple-entry accounting will fundamentally improve accounting when properly implemented.

Although blockchain technology-based triple-entry accounting could disrupt the entire accounting industry, academic as well as industrial research on the subject is extremely limited in India. We hope that a better understanding of the historical development of triple-entry accounting concept stimulates the academic debate among accounting professionals. ███

References

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