Why Is Accounting Called the Language of Business?
Accounting is often referred to as the language of business. It is widely used in the business world to describe transactions between different organizations. Therefore, the terms and concepts of accounting are used by managers, owners, investors, bankers, lawyers, business accountants – everyone who is somehow involved in business life. Since this is a special language, many words and terms of everyday speech have a completely different meanings in it. To master this language, as well as any other, requires some practice. The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. This can help both business owners and financial advisors make productive decisions in business.
Ever wondered why financial accountants are called bean counters? Or what about how the word accounting originally referred to Roman numerals or to the process of counting beans? Well, we’re going to tell you! Keep reading to learn more about why accounting is called the language of business.
The Origins of Accountancy
The term accountant originated in 15th century England, where it referred to an officer responsible for looking after a household’s finances. By 1600, that definition had broadened to include those who managed public and corporate money. At first, the double-entry bookkeeping system was a clerical task performed by junior clerks or apprentices. The job required long hours spent copying figures into account books by hand—it was tedious work, but with no real skill involved, anyone could do it.
Writing from an Accountant’s Perspective
Most people understand that reading, writing, and arithmetic are considered to be fundamental parts of learning. The same can be said for accounting, which is why it’s no surprise that there’s often confusion over why financial bookkeeping is referred to as a language. For many, accounting may seem like an exercise in numbers and spreadsheets rather than a means of communication.
However, when you consider how vital accounting information is to any business or organization, it becomes clear that financial accountants have their own unique way of expressing themselves through their profession. Accounting can be performed by only one individual as well as by an accounting firm.
Innovations in Reporting
One reason why accounting is called the language of business is that it’s so often part of a company’s vernacular as it is responsible for calculating and keeping financial records of business transactions as well as preparing financial statements or accounting statements. Further, these statements are involved in reporting a company’s various business activities in the accounting language or language of accounting.
How do you talk about your sales numbers? Your profits? Your expenses? If you are making an acquisition, how do you communicate with a partner or buyer about what will be included in that deal, and what won’t be—and why not.
In short, accounting plays a key role in communication between stakeholders within any given organization. Without a proper understanding of financial terms and figures, people would have to work together inefficiently to try to make sense of their businesses. That’s where accounting comes into play: as a way for all parties involved to speak clearly about their finances.
Reading Between the Lines
Even though accountants may not be business people, they are central to a healthy, functioning company. They keep track of how money flows into and out of businesses through a process called accounting. At first glance, some aspects of accounting can seem confusing, but once you realize all there is to know about accounting, it’s simple.
Not Just Numbers
While it is true that accounting is a language, it’s not necessarily what you think. In most cases, accountants record business transactions, so they can be interpreted by others. So in a sense, accounting is not just numbers—it’s how we use those numbers to inform us about where we are and where we need to go. Accountants translate these messages into financial reports, which allow the decision-makers and concerned persons to make future activities and decisions.
What is the language of business?
Basically, there are three major “languages” in business: accounting, economics, and finance. There are many business disciplines, including marketing, operations, and human resources. However, the core principles and terminology of accounting, finance, and economics drive all business decisions, current activity, and financial events of a company.
Accounting is the language of business. Is it true or false?
This statement is True. Accounting is how you record, classify and analyze business transactions. Accounting not only entails the upkeep of accounting records but also the preparation of financial and economic data, as well as the measurement of transactions and other business events. Do you want financial translation services? Read now.
What is the role of accounting in business?
Accounting is essential to the success of a business. It allows you to track income and expenses, comply with statutory requirements, record financial transactions in books of accounts, and provide quantitative financial information that can be used by investors, management, government, and other stakeholders to make business decisions. Hence, accounting supplies pretty valuable information that is crucial for business judgments.
Essence of Accounting
The entire accounting system was created with one goal – to record the business transactions taking place in the organization and to tell interested parties about the results of the company’s activities. A prerequisite for the implementation of reliable accounting is the continuity of the accounting process, which allows us to talk about the objectivity of the data obtained from accounting reports.
Accounting data make it possible to draw a conclusion about the economic and property condition of the enterprise and make informed and effective management decisions based on them, analyze the organization’s activities for any reporting period, develop plans for its further development, and monitor current work. Accounting helps to make a decision in any non-standard situation, decide on the company’s future policy and attract potential investors.
What is Financial Accounting?
Financial accounting is a branch of accounting that deals with the analysis, reporting, and summary of financial transactions relating to businesses. This includes the preparation of financial statements such as income statements that are available for public consumption. These statements are often published 6 to 10 months after the accounting period ends, preferably on a quarterly or annual basis.
Financial accounting is also responsible to report the financial information of an organization to external users of the data, such as creditors and investors.
Why accounting is the universal language of business?
Accounting is a universal language of business because it can be used to express any transaction that occurs in the course of economic activity. With the help of numbers, information is provided on the status of accounts and the availability of funds in the cash desk of the enterprise, the number of wages paid, sales volume, the state of equity, settlements with suppliers and customers, debts on loans and taxes paid.
Management accounting rules govern accounting because grammar controls the language. The management authority conducts business using accounting information and then publishes the results in front of external parties like stakeholders. Also, accounting reports and financial records are often used to detect the financial growth of a company. Hence, accounting is referred to as the universal language of business.
Nowadays, it is very important for a manager not to miss the provided training opportunities and to invest not only in the technical development of the business but also in training the professionals of his company in the field of accounting and taxation. Not understanding this simple truth means falling behind already at the start in organizing and doing business.
Definition of “Business Language”
Warren Buffett first took credit for accounting as a business language in 2014. Buffett points out that, in a way, accounting is in a way a foreign language that must be learned before it can be understood. As with English speakers, French or Hebrew accounting has many terms that sound common the first time you encounter them: fixed assets, retained earnings, accounts receivable.
The great thing about learning a language is that you can speak it anywhere. Anyone who understands the basics of GAAP can read and understand any income statement or balance sheet drafted in accordance with U.S. GAAP.
Even before Buffett turned the phrase around, accounting as a business language had been used for centuries. The Sumerians used accounting, but not in any form that GAAP would recognize. Communication counts use physical tokens to represent real goods: for example, 10 stylized cow numbers represent the sale of 10 cows. Foreign traders can compare the number of tokens to the number of cows and confirm that the number is accurate, even if they don’t speak Sumerian. Even an incalculable trader can figure this out.
Other Business Languages
Accounting is not the only subject defined as the language of business: finance and economics can also qualify. All three are part of the core decision-making process. Accounting language explains the financial position of a business: how much money it brings in, how much its assets are worth, and how much it owes. The language of finance takes data developed by accountants and uses it to predict the future: How will the value of the company grow? What is the rate of return for investors? How should the company allocate funds? Economics is the language for discussing the fundamental principles of buying and selling jobs: supply and demand, consumer preferences, and price elasticity.
All three languages can play a role in business decisions. For example, let’s say your company has to decide whether to invest time and money in launching a new product. Accounting gives you hard numbers for the cost of similar products in the past. It also gives you figures on the price to buy more manufacturing equipment, and raw materials, and hire more workers.
However, accounting itself may not be able to give the right answer. Past costs include overhead such as utilities and overhead such as administrative salaries. These may not go up when you add new product lines or increase production. That’s why you need finances and economics to predict the future.
Using financial language, you can start with accounting data and then ask further questions. For example, how does the cost of producing a new product affect your cash flow? Even if you’re sure that the product will eventually be profitable, but it might burn a lot of cash in the short term? If you’re spending cash that makes paying your bills more difficult in the first few months, it won’t fly.
The language of economics can help you understand what price ranges are acceptable to consumers and the quantities that can be sold at different prices. If you have the flexibility to increase the price from your initial forecast, you can solve the cash flow problem.
How versatile is the accounting language?
Speaking accounting is a neglect of business language, just like a colloquialism, accounting has different dialects around the world. In the United States, publicly traded companies are required to produce annual financial statements that comply with GAAP rules. Most of the rest of the world relies on a different set of guidelines known as IFRS or IFRS.
IFRS and GAAP are very similar. The differences between them aren’t as drastic as day and night, but it’s trickier because the differences are easy to ignore. For example, this could lead to investors encountering GAAP errors when evaluating financial statements prepared in accordance with IFRS.
- GAAP allows very little room for exception or interpretation. IFRS provides businesses with greater flexibility.
- GAAP allows companies to use inventory valuation methods that IFRS does not allow. IFRS allows companies that reduce the value of inventory on the books to increase its value; GAAP does not.
- IFRS and GAAP value intangible assets such as patents and copyrights differently.
- IFRS allows companies to write off development costs over time. GAAP requires businesses to deduct expenses in the year they incur them.
- GAAP separates debt to be repaid during the year from long-term debt. IFRS does not.
Anyone doing business in the U.S. and abroad needs to be bilingual in both languages. Just to complicate things, the differences will change over time as the accounting world tries to reconcile the two languages. The GAAP-based income statement is used to separate “special items” (such as the impact of a strike or earthquake on the company) from regular income and expenses. IFRS does not. Ultimately, GAAP agreed to IFRS and dropped the extraordinary items.
Frequently Asked Questions
An accounting error is an error in accounting records that were not intended. The mistake or error is usually fixed immediately after it’s discovered. If the problem persists, an investigation is initiated.
- Financial accounting
- Academic accounting
- Management accounting
- Governmental accounting
- Public accounting
- Cost accounting
- Forensic accounting
- Tax accounting
The accounting cycle is a process or system that identifies, analyzes, and records the accounting events for a company. It is a standard multi-step process that begins when a transaction occurs and ends with its inclusion in the financial statements.
GAAP (Generally Accepted Accounting Principles) are accounting standards that cover the legalities, complexities, and details of corporate and business accounting. GAAP is the basis of the Financial Accounting Standards Board’s comprehensive collection of approved accounting methods.