Bitcoin, Triple Entry Accounting, Collateralized Wages
Category : Bitcoin Technology
In his Feb. 10, 2014 Bitcoin Magazine article titled Triple Entry Bookkeeping With Bitcoin , Jason M. Tyra explains Bitcoin's potential effects to the accounting profession. In the article he writes
"Double entry bookkeeping revolutionized the field of financial accounting during the Renaissance period. Whereas simple ledgers had long been the standard for record keeping for merchants, the church and state treasuries, the growth of long distance trade and creation of the first joint stock companies resulted in firms whose records were too voluminous and complicated to provide any assurance of accuracy to their users….The double entry system solved the problem of managers knowing whether they could trust their own books."
Double entry accounting changed human history. It essentially enabled the employer-employee relationships to develop and, without them, companies such as Ford, IBM or Google would not be possible. The key benefit was that double entry accounting enabled bookkeeping practices to be used to help make sure the parties to the employment contracts were remaining honest.
Jason later goes on to explain the role of the independent auditor:
“Thus came the independent public auditor, whose role was (and is) to serve as an independent guarantor of financial information. Stakeholders placed their trust not in a firm’s management, who had a vested interest in presenting the rosiest of pictures to all who cared to ask, but in the auditors retained by management to vouch for them. It doesn’t take an attorney to see how a problem of agency is created by this arrangement. Do auditors work for the managers who hire and pay them or for the public that relies on their integrity in order to make decisions?”
Realize that the emphasis to the last line is my own as I want to call attention to a very important detail he points out about who is paying the auditors. Who pays whom can be the crux of many potentially sticky tax and legal issues and to loyalty also so I need to add a disclaimer here that none of the following constitutes legal, tax or accounting advice. The “killer app” I'm about to describe could change many instances of employee/employer relationships into a completely different one just by use of some very simple Bitcoin features by enabling a change in the way employees get paid. This could have as large an effect on human history as the introduction of double entry accounting did.
Let's use an example of a small business that has an “employee” and, as is usually the case, the employee is an hourly employee (as opposed to a salaried one). Since the contracted term is “per hour” then the employee is “technically” owed an hours wage after they worked even a single hour. The usual employment agreement doesn't say the company would issue a pay check hourly, of course, but Bitcoin could easily accomplish this for any business that accepts Bitcoin.
How would this work? When a customer comes in and makes a purchase and paying with Bitcoin, there would need to be a Bitcoin based invoice generated to receive that payment. The invoive will display a public Bitcoin address for the customer to send payment to. Suppose that before the invoice is generated the computing program checks the time clock records to see if the company owes the employee wages. Upon discovery of a sufficient quantity of back wages (by sufficient I mean more than the payment of the customer) the invoice would receive the address of the “employee” to display rather than the address of the business. The program then just needs to do some internal accounting to make sure the hours are tagged as already paid. A key point is that the payment went direct from the customer to the “employee” and without any third party involvement. Such a possibility could completely change “employee” relationships into a totally different one. What kind I'm not totally sure.
Perhaps if we go over the details of the above transaction again but this time use what I think are more accurate and factual terms and words. Instead of calling them the company the “employer” let's call them the “borrower” because they owe the employee money. And rather than calling them the “employee” let's call them the “lender”. Now we end up with a borrower/lender relationship. In this link http://www.accountingcoach.com/blog/assigning-accounts-receivable it states “The purpose of assigning accounts receivable is to provide collateral in order to obtain a loan.” . The page http://www.accountingcoach.com/blog/what-is-accounts-receivable defines them as “goods and/or services.”. So before the “lender” makes a loan of their services they usually require that the borrower provide an “assignment of accounts receivables”. In our model, the lender/employee can opt into the invoicing process and the company can make sure there is actually a debt/wages owed.
So when the customer is about to make a payment we will call it an “accounts receivable” of the company. The payment is already promised as the collateral for the loan (to the employee) so the company records the payment from the customer in a separate “Accounts Receivable Assigned” ledger (a standard accounting practice from what I understand) as is described in those links.
As we started out saying, in tax compliance issues words are very important (especially the words of contracts and agreements between small businesses and the people that help them). By the use of borrowing and lending terminology along with the accounting terminology associated with assigning debt it becomes apparent that the typical employer is actually borrowing money from their employees.
Who is paying whom becomes important to determine whether the requirement to file a Form 1099 by a company is triggered. They are required to file one for anyone they pay over $600 in wages. In the above arrangement the payments is going directly from the customer to the lender. So who is paying whom? The employer didn't and the amount may or may not be required to be counted towards that limit.
But there is yet another layer of possible assignment using Bitcoin. Suppose the employee wants a loan themselves with a lender who is willing and perhaps even eager to accept Bitcoin for repayment. It would be trivial for the employee to provide a form where the address could be changed by the employee. The form could also have inputs for adding multiple addresses with differing execution dates, priority levels and payment amount limits for each level. The lender may have as a condition of the loan that they get paid first and the employee would then only need to substitute the address of their new creditor for their own.
back to the issue of "whom is paying whom", in such a case the payment of the customer doesn't go to either the company nor the "employee" but to the creditor of the employee. The above scenario is enough to give tax preparer's nightmares … but I see a potential of it happening.
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