Accounting systems and crypto assets.

The purpose of this post is gain a better understanding of the accounting system.

This will be done by identifying the different components of financial statements.

• Income statement.
• Statement of financial position.
• Statement of changes in Equity.
• Statement of cashflows.

Then looking at how these statements are connected and understanding their purpose in business and blockchain. Accounting is the classification and recording of monetary transactions. These reports then present those transactions for analysis of performance and financial position.

To get into this subject we need to look at the accounting equation first of all.

This states that,

The total assets of a business are equal to the liabilities of business plus the equity of the business.

Or in more basic terms.
The assets are anything of value in the company and the total assets are equal to the amount owed to other plus the amount owed to shareholders.

Why we are looking at this is fascinating. We are looking at existing financial reporting to see how it will be affected by blockchain based assets. How will a company set out there reporting when they have Bitcoin, hive and 50 other tokens or assets on the books with fluctuating values and use cases? Where does the definition lie?

There will be significant issues around the reporting and standardization of blockchain based assets as there is going to be such a wide variance of assets. From a personal accounting perspective, You could crypto based assets that include.

• NFT Art
• Gamified items.
• Governance tokens.
• Bitcoin.
• Privacy coins.
• General Crypto tokens.
• Real estate.

Just to name a few and you can earn some returns from staking, lending, spending,speculation ect...

The question then becomes are all of these classified the same way and accounted for in the same way?

Some tokens are a store of value. some are a cash replacement, some are a cash back reward? The current system that we utilize for accounting and taxation was built for a different set of assets and doesn't hold up under the weight of emerging technologies.

This is only the beginning and we are seeing a lot more use case for different cryptocurrencies that didn't exist 5 years ago even. To properly come to grips with the sector there will need to be a whole new set of rules and an understanding of what these assets represent.

At a business level, it would be very hard to account for large quantities of these tokens as they are so fluid compared to cash, assets or shares that the system was designed to represent.

Emerging technology changes at a ferocious pace and unfortunately existing systems crawl to adapt to anything new. They are still in the stages of identifying the rule set to work with while those assets have already evolved to new levels of complexity.

If you were to do up your financials, the first thing to do would be prepare an income report.

This is a summary of various revenues (income) earned and expenses incurred over a period of time/reporting period. Could you do this for your crypto portfolio over the past 12 months?

I know that I couldn’t, even taking into account just my trades it would not be possible across all of the exchanges, apps and tokens to complete a record of my income and expenses incurred.

Crypto is getting a lot of attention at the moment and as such will attract the eyes of the government and the tax man. It’s going to be interesting to see what way all of this falls over the next couple of years but there will need to be a proper government review to classify the blockchain sector and its assets.

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