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Triple Entry Accounting

See Sox accounting, for why we need to replace Sox accounting with triple entry accounting.

In triple entry accounting all parties to a transaction keep the same digitally signed record of atransaction.

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.

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 accounts.

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:

Credit entries are ones that account for the following effects:

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.

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