wallet/docs/manifesto/triple_entry_accounting.md

title: >- Triple Entry Accounting ... See [Sox accounting], for why we need to replace Sox accounting with triple entry accounting. [Sox accounting]:sox_accounting.html "Talmudic Ritual Purity" {target="_blank"} [Talmudic ritual purity]:sox_accounting.html "Sox accounting" {target="_blank"} # What is triple entry accounting Double entry accounting ensures that the books of the corporation are internally consistent. Triple entry accounting ensures that the books of the corporation are not only internally consistent, but that its account of its obligations and transactions with clients and partners is consistent with their account. This requires a shared pool of data shared between several entities who have long lasting and repeated durable business relationships with each other, and if it is a lot of data, a blockchain. Blockchains are designed with considerable care against various subtle forms of cheating, and this design is profoundly difficult, complex, and notoriously subtle and difficult to correctly implement. The way of the future will be to move bookkeeping, accounting, and various other measures against cheating to the blockchain. The fundamental force moving us to a blockchain based world is an untrusted and untrustworthy elite. # Triple entry accounting and corporate sovereignty A corporation is not so much a legal fiction, as a book keeping fiction. The first double entry accountants wanted to know how an enterprise was doing, so they created double entry columns that made the books of the enterprise balance, rather than the merely the books of the owner balance. And by enough people believing and acting as though the enterprise was itself a real thing, it became a real thing, the real thing being those people acting as if with one will, the will of the enterprise. And then King Charles the second gave some of these accounting fictions legal status as corporations, creating the modern joint stock publicly traded for-profit corporation, the modern corporation. And thus created modern capitalism, which worked spectacularly well. (We now, unfortunately, have postmodern capitalism, which is working very badly.) Corporations are people, real people, because enterprises are real people, whose will is made one through bookkeeping tracking what value they create and cost for each other. A corporation is not so much a legal fiction, as a book keeping fiction, fictions imagined into reality by real people acting as one. It is not the buildings and the tools that are the corporation, but the unity of action. This is what makes it possible to move corporations onto the blockchain, to substitute cryptographic algorithms for the laws of men. Double entry book keeping is social technology. It fundamentally shapes our society, even though almost no one understands it. The corporation exists through double entry book keeping. A small number of partners who own a business, who know and trust each other, and understand double entry book keeping can enforce it on each other, but the publicly traded joint stock corporation exists through state enforcement of double entry book keeping. And increasingly what the state is enforcing is not double entry bookkeeping. Instead of tracking the creation and movement of value, the books track the creation and movement of [Talmudic ritual purity]. The block chain can enable a very large number of business owners who do not know and trust each other and who do not understand double entry bookkeeping to enforce double entry bookkeeping on each other. Suppose your company’s books are triple entry accounting based o immutable journal entries, and its shares are on its blockchain, not on the records of the government regulated stock exchange. Such an enterprise derives its cohesion not from a grant of corporateness from the state, but because all the shareholders have to follow the rules because all the other shareholders are following the rules, as every blockchain works. They don’t have to understand how the wallet works, they just have to understand that if they don’t have money in their wallet, they cannot pay, and if they don’t have shares in their wallet, they cannot sell them and cannot vote when there is a board election. This renders the corporation independent of the state. The state can coerce the CEO, the board, and the shareholders, the same way as it can coerce anyone else, assuming it can find them, and assuming it can discover what they are doing, but the company is not longer a creation of the state, animated by state enforcement of its corporate character and state enforcement of its book keeping. This makes it vastly harder to tax and regulate, even if only 0.001% of the population understand the cryptographic protocols employed by their wallet. If the corporation exists as blockchain protocols, the government cannot simply deduct money out of your paycheck – it has to send men with guns to knock on your door and say “pay or else” – and it has to find you, which may not be easy if you are working remotely, or you are working in person at a small remote branch of the business. The board probably has its meetings virtually. They probably cannot find the board, though the CEO probably has to show up in person a lot. This also puts me back in business, since startups will once again be possible. Startups have been regulated out of business. # Differences between triple and double entry In triple entry accounting all parties to a transaction keep the same digitally signed record of a transaction. Triple entry accounting is floodfilling digitally signed transactions around all parties affected, and then displaying relevant totals over these digitally signed transactions. The relevant totals correspond to the various asset and liability subtypes of double entry accounting. It is triple entry, because the same digitally signed record shows up in many places – and not exactly two, nor for that matter, exactly three. It is triple entry because double entry shows that entries in the books agree with each other, while triple entry shows that they agree with the books of other enterprises. Sums over these records preserve the invariants of double entry accounting. Failure to preserve the double entry invariants indicates a communication failure, update failure, or disk corruption that forces an automatic retry until double entry invariants are restored. The underlying digitally signed records of transactions are flood filled around, guaranteeing that all parties have consistent books, that not only does one entity's books balance, but that the entries in one entity's books are consistent with the entries in another entity's books. In regular double entry accounting, all totals are assets or liabilities, and every transaction causes a change to two totals, every transaction has two effects, such that total assets and liabilities remain equal to zero, or equal to its initial value.  The business has zero net assets, because it owns stuff, and owes its owners stuff. Every transaction has two effects. For example, if someone transacts a purchase of a drink from a local store, he pays cash to the shopkeeper and in return, he gets a bottle of dink. This simple transaction has two effects from the perspective of both, the buyer as well as the seller. The buyer’s cash balance would decrease by the amount of the cost of purchase while on the other hand he will acquire a bottle of drink. Conversely, the seller will be one drink short though his cash balance would increase by the price of the drink. Accounting attempts to record both effects of a transaction or event on the entity’s financial statements. This is the application of double entry concept. Without applying double entry concept, accounting records would only reflect a partial view of the company’s affairs. Imagine if an entity purchased a machine during a year, but the accounting records do not show whether the machine was purchased for cash or on credit. Perhaps the machine was bought in exchange of another machine. Such information can only be gained from accounting records if both effects of a transaction are accounted for. Traditionally, the two effects of an accounting entry are known as Debit (Dr) and Credit (Cr). Accounting system is based on the principal that for every Debit entry, there will always be an equal Credit entry. This is known as the Duality Principal. Debit entries are ones that account for the following effects: * Increase in assets * Increase in expense * Decrease in liability * Decrease in equity * Decrease in income Credit entries are ones that account for the following effects: * Decrease in assets * Decrease in expense * Increase in liability * Increase in equity * Increase in income Double Entry is recorded in a manner that the Accounting Equation is always in balance. Assets – Liabilities = Capital Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability or equity (Cr) and vice-versa. Hence, the accounting equation will still be in equilibrium. Triple entry accounting is double entry accounting with each transaction linking to signed agreement by the relevant parties, and the relevant parties sum over these signed agreements in different ways, that result in the assets and liabilities of each entity coming out correctly. Everyone accumulates a pile of signed transactions, and these signed transactions belong to categories such that the double entry invariants are preserved. Triple entry accounting is that we have a pile of signed database records with a rule that any complete collection of the relevant records results in both parties seeing the accounting invariants preserved, and automatic check and retry in the event of discrepancies. It ensures that not only do one company's books reflect a consistent view, but both parties share the same consistent view of each other's obligations.