Warren Buffet once said to an intern, "accounting is the language of business." In our contemporary business landscape, this makes sense. Every formal ecommerce or traditional small business you trade with knows this language—it's a necessity.
Success in anything is related to communication. How well you communicate dictates how far you can go; to communicate, you must know the language. The same thing goes with the language of business—accounting.
Let Unloop tell you why accounting is the language of business and how you can learn it to take your business to a whole new realm of success.
Why Is Accounting the Language of Business?
Just as we need language and speech to exchange ideas, accounting is born out of the need to exchange money. As soon as we used money as a medium of trade, the need to count it followed—this is in the spirit of fair trade.
Since then, counting money has grown more sophisticated. It has become known as accounting, and we use it today because of the following.
It Supports Finance
In the context of business, finance is the discipline of managing money. Yet, for money management to exist, there has to be something tangible to work on. That's what accounting provides—numbers.
Accounting allows business owners to look at their financial transactions and interpret them to manage their business's resources effectively.
Accounting Aids Economics (and Vice Versa)
On a macro level, accounting generates financial and economic data that policymakers can use to formulate monetary and fiscal policies that will eventually keep the nation's economy healthy.
On a micro level, business managers also use financial statements to create new business and management policies to help the business grow, be it a traditional one or one in an online marketplace.
It’s the Lingua Franca of the Business World
Accounting follows a standard called the Generally Accepted Accounting Principles (GAAP). This solidifies the accounting concepts, processes, and methods used enough to make it adaptable by everyone doing business.
Every business that pays taxes uses the same language with few variations, which adapt to the region or state they do business with. But more or less, this allows all accountants and business people to understand each other. It makes it easy to interpret and audit financial documents and make sound business decisions.
The Pillars of the Language of Accounting
The road to learning the language of business starts with the fundamental parts. Like in speech—where we have nouns, pronouns, verbs, adjectives, and adverbs that serve as building blocks of sentences—accounting has the following five pillars.
Every tangible or intangible thing put into the business is considered an asset. It can be property, equipment, furniture, vehicles, labor, and money on hand or to be received.
Recognizing assets involves determining their value in monetary terms. That said, the easiest to quantify is the most liquid form of asset: cash. As for other assets, such as property, accountants find their market value and record their money equivalent.
Long and short-term debts incurred by a business fall under liabilities. This is considered a pillar because it is part of every business's nature to get into debt.
Liabilities are expressed in monetary terms representing the amount of obligation a business has. Some examples of liabilities are short and long-term loans, accounts payable, mortgages, and other expenses that are yet to be paid.
Equity - Capital
Equity is a stakeholder or a sole proprietor's share of the business expressed in monetary terms. Accountants determine this by getting the difference between assets and liabilities; the resulting amount represents a businessperson's ownership value.
This pillar increases or decreases in value depending on business performance. In any business structure, the goal is always to increase the amount of equity. Commonly this is done by making efforts to increase sales and revenue, but accountants and finance people know other activities that can grow equity.
This pillar expresses the day-to-day expenditure of a business. It's straightforward, but expenses can behave differently and come from different business sides.
For example, you have expenses from producing goods (often called costs), then you also have expenses coming from administrative functions, such as payroll and supplies. To get an accurate picture, accountants must classify all these expenses accordingly.
Money that comes into the business, mainly from selling goods and services, is called revenue. But just like expenses, revenue can come from other sources besides sales. Revenue can also come from interests earned or rental income from a property, just to name a few.
Financial Statements: Communicating the Accounting Language
The pillars of accounting language make up business transactions recorded in the books. These are then processed and arranged into an understandable form called financial statements.
Financial statements communicate the accounting language that most accounting professionals, managers, and business owners can understand. They come in three forms.
The Income Statement
This instrument breaks down revenue and expenses incurred during a period of business operations. Essentially, it communicates how much money the business earned from sales and other sources of revenue. It also tells you how much of the revenue the business keeps after all expenses are accounted for.
The resulting bottom line, also known as net profit after tax, forms part of the business's assets which will affect the balance sheet.
The Balance Sheet
Balance sheets communicate the value of the business. It breaks down assets, liabilities, and equity to arrive at a monetary equivalent of a business's worth and, eventually, how much the owner can get from it.
This instrument follows the accounting formula of Assets = Liabilities + Equity, meaning the total amount of the asset section must be equal to the combined amount of liability and capital represented in another section.
The Cash Flow Statement
The cash flow statement filters all the cash transactions of a business and categorizes them into three different business activities: operations, financing, and investment. This is one accounting statement that communicates the degree of money inflow and outflow.
A cash flow statement is important to business managers as it gives them a bird's eye view of where cash resources are used and how it stalls or propels business growth.
Accounting Professionals Are Your Translators
Accounting professionals understand the pillars of accounting and the complexities attached to them. They act as translators. They keep all transactions to arrange them into financial statements that communicate accounting in understandable format.
As translators, they have knowledge and skill sets that allow them to make complicated things simple. These skills allow them to do the following.
Bookkeeping is classifying and recording business transactions in line with generally accepted accounting principles. The bookkeeping process follows full cycle accounting and builds the business's accounting records which the accountant will use to draw up accounting reports.
Financial Statement Reporting
Preparing financial statements comes after bookkeeping and is done monthly or yearly. Generating financial reports depends on bookkeeping, and the more accurate the financial records, the more financial statements communicate to stakeholders.
Accountants can also check the methods other accountants use. This is called auditing and helps ensure that recordkeeping and financial statement reporting align with the standards.
Part of understanding the language of accounting is being adept with taxes and how it affects the business. So accountants study different taxes and keep themselves up to date with current tax laws to ensure accurate and compliant tax expense recording.
If there's anyone who knows how your business works, it's the accountant. They look at the numbers and see the nut and bolts of your business. As such, they can take on a consulting capacity and advise managers on which parts of the business need attention to ensure increased profits and equity.
Understanding the Accounting Language Is a Process
Any business owner wanting to increase their chances of success must understand accounting. But just like any language, it takes time to learn.
The good news is you can speed up the learning process by working with someone fluent in the language. These are the accountants.
Work with them, let them help you understand the language using financial statements, allow yourself to read them, and be sure to ask your accountant questions. In time, once you have more insights and have read many financial statements, you'll be poised to lead your business to greater heights.To learn what the language of business is and how to use it to increase your chances of success, book a call with us or check out our bookkeeping services now.