Three Methods for Simple Bitcoin Business Accounting
This is a guest post from Digital Currency Council Member Marty Zigman.
Recently, I gave a webcast presentation to AICPA members to help accounting professionals understand Bitcoin and how to treat it on the general ledger. If you are an AICPA member, the webcast is available for your viewing. In this article, the key points from that presentation are outlined and will help accountants fundamentally understand and approach business based Bitcoin transactions.
Bitcoin and General Ledger Treatment
There are three key processes that ultimately produce different accounting practices and general ledger treatment when Bitcoin is involved. These three processes coincide with Bitcoin’s adoption phases as follows:
- Payment Method
- Foreign Currency
- Base Currency
Bitcoin as a type of “Payment Method”
Within the context of modern accounting systems, examples of payment methods include cash, checks and credit cards. Very simply, they define the medium used to exchange money.
Today, the most common business use for Bitcoin is to treat it as a payment method. Much of the reason for this is because a) the price is relatively volatile and b) acceptance by employees, suppliers and partners is relatively limited. Services such as BitPay or Coinbase have effectively made it easy to accept bitcoin in a business. Instead of the business actually receiving bitcoin during customer payment, these services deliver traditional government-issued (fiat) currency.
Under this method, Bitcoin acceptance is easy to understand and it follows accounting practices widely used in business today (e.g., consider payment by services such as PayPal). Traditional accounting systems should have no problem under this practice. Generally, define a new payment method in the accounting software, relate it to the bank account that the funds will settle, and then follow the procedures that the Bitcoin service provider prescribes for accepting bitcoin in the business.
Bitcoin as a type of “Foreign Currency”
The next adoption wave will happen if bitcoin price volatility stabilizes and it becomes more widely accepted. Some leading-edge businesses already work in this fashion. Under this method of accounting, bitcoin is treated as a foreign currency; just as one would treat accepting Euros in a USD-based organization. To do this well, the business accounting system will need to understand foreign currency and related exchange prices. Traditional accounting platforms are designed with “currency data types” to accommodate only two decimal places. I was one of the early advocates to logically shift the bitcoin decimal place to the right by six digits and base bitcoin in micro bitcoin (µBitcoin) thus allowing it to work in common general ledger accounting systems.
Not all accounting systems allow for new foreign currency definitions — hence, if the business software is designed only for local currency, this method of accounting will not work. In addition, some accounting systems “hard code” their foreign currency references, and accountants may find this to be a limitation in their client or internal systems.
Under foreign currency accounting, a business bases its transactions in a local currency but may denominate transactions and/or accept foreign currency to conduct business. This practice is well understood in larger organizations — especially ones that transact in international trade.
Under this method of accounting, without respect for local tax regulations that demand different regulatory reporting requirements, bitcoin transactions effectively trigger both realized and unrealized gains and losses based on changing market currency exchange rates and timing differences between when transaction obligations are recognized and ultimately settled.
Finally, when bitcoin is treated as a foreign currency, the accounting software will price every single transaction relative to the base currency. With this price information in hand, a tax accountant can reconstitute the records offline to meet regulatory reporting requirements; such as the recent IRS guidelines that demands that bitcoin be treated as a property.
Bitcoin as a type of “Base Currency”
In the final adoption wave, while it may be far off, it is conceivable to see businesses deem bitcoin as the base currency and thus treat all other currencies as foreign — even the home currency. While this is simply an enhancement of the Foreign Currency treatment previously discussed, this method may be valuable for organizations that are fundamentally global and trade with customers, employees, suppliers and partners anywhere and everywhere. While, this accounting treatment will produce a different orientation and obviously introduces interesting reporting questions, if many organizations elect this method, it does represent a way to measure whether bitcoin has indeed achieved wide global acceptance.
Is Bitcoin integrated with the General Ledger today?
Companies that run NetSuite are set up to transact globally and with BTC4ERP, they have the full range of options to configure their accounting practices based on the way they see bitcoin used in their business. I witness some companies who simply seek a bitcoin price feed into their accounting system to help them with their own manual methods of accounting. Others indeed treat Bitcoin transactions as foreign currency and rely on the automatic bookkeeping and transaction coordination provided by my service. If bitcoin gains wider acceptance, I suspect we will see these accounting treatments on a wider range of accounting systems.