“Accounting is the language of business”
Accounting is most often referred to as the language of business. It is so because accounting serves as a means of communicating and presenting business information to interested parties.
The primary function of any language is to facilitate communication. And accounting fulfills this role as it is the mechanism through which business information is recorded, analyzed and presented in the form of financial statements.
Why is Accounting often called the language of business?
The following points may be useful to consider here:
- Answers to financial questions:
Many questions strike our minds when we think of a business organization. Is our business profitable, should a new product line be developed, did we reach the desired profit level, are the sales sufficient?
To get answers to all of these questions, we require information generated through the accounting process. Such information is used by those who make policy decisions in a business and develop corporate strategies.
- Aids in the flow of information:
Just as arithmetic is an indispensable element of mathematics, bookkeeping forms the basis of accounting. Through the recording of business transactions in the books of account, financial information about a business entity is generated and then reported to users such as shareholders and managers.
The diagram below shows how an accounting system operates in business and how the flow of information occurs.
1. Business transactions occur
2. Accountants prepare reports to show the results of business operations
3. People make decisions
- Easily accessible format:
In order to manage everyday tasks and maintain a successful business, any firm, big or small, requires a proper accounting system. It collects and organizes financial data into an easily accessible format that can be understood by anyone in the business world.
The end results are reported in the form of a Balance Sheet, Income Statement, and Statement of Cash Flows.
- Types of stakeholders and information needed by them:
Accounting, as the language of business, is used to communicate financial and other information about various elements of business to individuals, companies, governments, and other entities.
The accounting process measures a variety of business results, including costs, prices, sales volume, value under ownership, return on investment, and so on. All of these accounting measurements are used by internal and external stakeholders (owners, investors, management, creditors/bankers, and so on) in the course of their corporate operations.
In the business world, nothing is really done that does not require accounting data in some way. For example, when a company seeks to apply for a loan from a bank, it will have to submit information about its business activities, in terms of operating results (profit or loss) and financial position (assets and liabilities).
Similarly, in order to evaluate the performance of management, shareholders or prospective investors must have access to financial information. In addition, many regulations require detailed financial information to be reported to various government departments such as the income-tax department, the sales tax department, the company law board, and so on.
- Knowledge of accountancy:
Because of the rapid advancement in commercial activities as a result of industrialization and globalization, the need for people to have sound accounting skills has grown a lot. It is difficult to survive in today’s advanced corporate environment without proper knowledge of basic accounting.
Role of accounting principles
From the above discussion, we have seen that accounting is often called the language of business through which a company communicates with the external world. But to ensure that this language is intelligible and commonly understood by all and that it conveys the same meaning to everyone as far as practicable, it must be based on some uniform scientifically laid down standards.
For this purpose, certain accounting principles, conventions and standards have been developed over the period. These are guidelines that establish sound accounting practices and procedures in reporting the financial status and periodic performance of a business.
Accounting principles can be classified into two categories (I) Accounting concepts (like going concern, money measurement, business entity concept, etc.); and (II) Accounting conventions (like consistency, materiality, etc.). Apart from these, accounting standards are also issued & reviewed from time to time by national and international governing bodies such as ICAI, IASB, FASB, etc.
Such principles or standards, by whatever name called, serve as a general law or rule that is to be used as a guide in the generation and presentation of financial statements. Without such principles in place, the accounting information shall become un-comparable, inconsistent and unreliable.
Accounting is rightly referred to as the “language of business”. It is as old as money itself. It is concerned with gathering, recording, assessing, and communicating the outcomes of commercial transactions.
Even though it was initially intended to satisfy the interests of owners only, it has progressively expanded its reach to a public role of addressing the needs of a wide range of interested parties. Accounting affects all people in some way or the other.
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