People have been searching for ways to automate bookkeeping activities for quite a long time. The earliest indications of bookkeeping date as far back as 8000 B.C. in old Mesopotamia. There is a proof of accounting dating 2000 B.C, when a bargain framework was set up to follow the exchange of labour and products. By the 1400s, single-passage accounting was the standard practice, followed by Luca Pacioli’s invention of the twofold section accounting framework in 1494.
It was only after the twentieth hundred years, however, that bookkeepers got away from paper records and started to utilise machine-driven strategies like IBM’s punch-card tabulator. Calculation sheets took over during the ’70s with the presentation of Visicalc in 1978.
What is crypto bookkeeping?
The cryptocurrency market has grown exponentially since the first Bitcoin transaction in 2010, and over a decade later, with almost 10’000 different cryptocurrencies in circulation the cryptocurrency market is now valued at more than $1 trillion. Industries and governments all around the globe have adopted blockchain for a variety of reasons. As it stands today, the securing of data is central to all organisations and as cryptocurrency becomes the common option for such an issue, the accounting professionals are starting to see cryptocurrency as a novel asset type that should be classified under accounting principles such as GAAP and IFRS.
Let’s give an example. A certified public accountant (CPA) is filing a client’s taxes report that must accurately account for cryptocurrency transactions — how does the CPA determine if a cryptocurrency is an expense or a liability? Or, an auditor is validating a corporation’s financial statements — does the auditor know how to evaluate the assets stored in the digital ledger?
A bookkeeper has now the role to reconcile bank statements with the digital ledger, and it is becoming evident that cryptocurrency is bringing a level of complexity to accounting professionals which seems to pair together accounting and responsibility in a double edged sword.
Read more: Cryptocurrency Tax Compliance Challenges
Challenges in crypto bookkeeping
Since crypto transactions are stored on the blockchain and not in ERP software, contextualizing the correct transactions and pricing them accurately can seem a complicated, time-consuming and error-prone process. The complexity intensifies due to difficulty in calculating cryptocurrency cost basis and fair market value as transactions span from multiple exchanges to various blockchains.
It is therefore important for companies to accommodate the accounting & tax challenges posed by the crypto world. For example, cryptos used in business operations are considered ordinary assets whereas cryptos held as investments should be described as capital assets. Companies that use cryptocurrency for business transactions hence should have a strong system to track crypto transactions allowing the proper record of the gain and loss for each asset.
To face this accounting challenge there is the need to trace the amount and the purchasing price for each crypto asset so that a gain/loss report reflecting price fluctuations over the fiscal years can be constructed.
Common issues with crypto bookkeeping
Regulators and rule makers need steady technical reports to guide their decisions. Accountants require clarity over blockchain data and entrepreneurs need assistance to be compliant in their projects. Luckily, most issues in crypto accounting stem from simple human error which might be easily overcome.
1. Incorrect Cost-Basis Calculations
The cost basis depends on the token evaluation when initially acquired. If a bitcoin was bought in 2017 and used for trading on other exchanges, it is hard to accurately report the cost basis of the subsequent crypto assets conversions without including the data behind the initial purchase. Sifting through nested transactions can be in fact mind-numbing. Be cautious when calculating the cost basis in crypto, always double check assets and always follow the accounting method suggested in the specific country your client is operating.
While crypto exchanges are public and can be seen on the blockchain, it is frequently hard to see the condition of your complete crypto portfolio in one spot and grasp adjustments of gains/loss across various wallets and resource types is not an easy task either.
2. Incorrect Spreadsheet Formulas
Spreadsheet errors are hard to spot even in traditional accounting. Crypto accounting is so new and complex that you might not recognize an obvious error until it’s too late. If you prefer using spreadsheets instead of more advanced tools, exercise extreme caution and try to find a platform or service where you can reconcile your calculations and results to confirm accuracy.
3. Incorrect Labelling Of Transactions And Accounts
Different transaction types are not taxed equally. If you label crypto transactions incorrectly — or worse, fail to apply labels at all — your client might risk finding himself in the need of answering unpleasant tax questions. Having the option to sort exchanges in an orderly manner is the main powerful method for ensuring your accounting is without mistake. It can likewise be precarious to ensure that your solicitations bind to the right exchanges and that it is easy to rapidly recognize exchanges utilizing classifications or updates.
For instance, one outbound Ethereum exchange can represent different transactions that should be represented independently: there could be an exchange of Ethereum, a gas charge paid to execute the exchange, and an increase/decrease related to the amount. Tracking and managing labelled transactions manually is a tedious and laborious task, software like Mensari are here to solve this problem.
4. Susceptible Security
Security frameworks are just as solid as their most fragile connections, and those points of failure are usually the people using them. Accounting sheets from Google or Microsoft are valuable, yet they come up short on the security degree necessary for following and overseeing private and sensitive crypto data. Normal missteps include clicking on obscure links, entering individual data into counterfeit records and sharing confidential data beyond an organisation’s network.
5. Bad Calculations and Inaccurate Exchange Fees
Crypto exchanges or price tracking tools like Coinmarket cap or Coingeko derive prices in slightly different ways and relying only on the data from one place over another could initialise a set of accounting errors that might take a ton of time and effort to correct. One of the most overlooked calculations is the quantification of exchange fees. Avoid putting yourself in a bad situation by using software to keep track of fees and calculations automatically.
The need for crypto bookkeeping & accounting software
Mensari is here to help bring together all crypto and DeFi activity in one place to generate financial reports in a single click.
We have developed the most user-friendly web3 infrastructure with the vision of building the most reliable and most affordable crypto accounting solution out there. And while automated crypto accounting software can simplify bookkeeping activities, it’s important to develop a comprehensive understanding on how to follow the most up to date accounting practices and reporting obligations.
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