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Each pair of partner nodes can execute a specific kind of smart contract. On this blockchain

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By now you’ve probably heard about cryptocurrencies like Bitcoin or Ethereum, and the blockchain technologies they utilize. What you may not realize is the extent to which blockchain technology has the potential to revolutionize many aspects of business, including accounting. Blockchain has the potential to provide ‘‘automated, high-fidelity, and low cost’’ record keeping (Deloitte 2019). It has the potential to revolutionize intercompany communication and payment through the ‘‘near-real- time reporting’’ of a ‘‘single, immutable truth’’ (EY 2020). Finally, it is a significant growth opportunity for professional accountants who understand the technology and related security, monitoring, and control implications (PwC 2020). In short, it’s something every accountant should understand.

This assignment provides both an introduction to blockchain concepts and applications, as well as an opportunity to process a set of basic blockchain transactions. It has three primary goals. First, we highlight the ability of blockchain technology to facilitate information sharing across organizational boundaries. Second, we attempt to demystify blockchain technology by making links to the database systems you’ve already learned about in your accounting coursework. Third, we cover potential applications of the technology to the accounting profession.

This assignment will provide you with a clear understanding of what blockchain is, how a blockchain works, and the ways in which blockchain technology will impact the accounting profession. If you would like to learn more, the citations at the end of the assignment provide a great jumping-off point toward increased technical understanding.

 

Learning Goal No. 1: Understand Blockchain as a Distributed Consortium

Blockchain technology is commonly described as a distributed ledger technology. The thing that differentiates blockchain from the ledgers you are used to from your accounting courses is its ability to process a distributed set of transactions that span multiple organizations. Any member of a blockchain consortium can post transactions to the distributed ledger, and those transactions can be viewed by any member with appropriate permissions.

Blockchain technology is designed to be used by a group (or consortium) of organizations. Spreadsheets, databases, and enterprise resource management (ERP) systems are typically designed to be used by a single firm or division, where everyone involved shares a common affiliation and a baseline level of trust. Blockchains are designed to share information across large groups of organizations, and the functions described above remove the need for those groups to trust each other. Instead, users only need to trust the blockchain technology and can use it to validate any information they might need to use. Consortium members can also grant user permissions as needed to regulators and auditors that monitor or query transactions.

Let’s see these concepts in action using an example. Smartify is a manufacturing company that purchases normal wristwatches, adds smartwatch technology, and then resells them to customers. Smartify has a great working relationship with each of its suppliers and customers, and hopes to improve service across its supply chain through a shared blockchain. The new system will enable real-time tracking of input parts and finished products through the company’s manufacturing process. All parties hope the resulting platform will enable efficient and reliable inventory reporting and preclude problems that arise when the records of a supplier and customer don’t match up.

The diagram below describes the proposed blockchain. The three left-most boxes are suppliers of Smartify watch inputs. The three right-most boxes are customers that purchase the finished product. The four boxes in the middle describe the Smartify manufacturing process: assembly, installation, quality assurance, and warehouse inventory.

Using blockchain terminology, each one of these boxes is a node. Each node in a blockchain is a participant in transactions that will be communicated through a specified channel. Nodes on either side of a blockchain channel must agree to share and validate every transaction before it is recorded in the shared ledger. This agreement is formalized through a smart contract, or a business document formalized into computer code. These contracts are considered smart because they can leverage the encoded agreement to process automatically. For example, Smartify could have an agreement with suppliers to automatically release payment as soon as an inventory shipment is received and recorded.

Let’s see these concepts in action using the diagram below. Just like the Smartify supply chain, the transactions on the Smartify blockchain begin on the left and proceed to the right. Nodes on the left side of an arrow initiate transactions. Nodes on the right side endorse transactions. Every transaction between two peer nodes is facilitated by a smart contract, where computer code takes the place of a traditional accounting document like a shipping notice, inventory transfer, or invoice.

2 Appendix A is available for download, in its full-color original version. See the link in Appendix C.

 Problem 1: Each pair of partner nodes can execute a specific kind of smart contract. On this blockchain, partners can execute supply, transfer, or sales contracts. The gear next to arrow a indicates that supplier Right Wrists and Build-4- You Corporation can transact with each other using a supply smart contract. Fill in the small boxes on the diagram to indicate what kind of smart contract each pair of partners can execute (supply, transfer, or sale).

 

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