Why Accounting is Known as the Language of Businesses
Accounting is often referred to as the “Language of business.” It is a means which businesses around the world use for communicating and presenting different information.
In any language, efforts are made to express a specific feeling through the use of words one after another. Similarly, in accounting, businesses record all their financial transactions in their books and from there they prepare financial statements that contain both financial as well as non-financial information which in turn provides an entity’s stakeholders and shareholders with a true and fair view of the entity’s financial position and performance. The financial statements of a company contain a balance sheet, profit or loss statement, cash flow statement, statement of changes in equity, and notes to the financials.
Accounting is the process of collecting, recording, summarizing, analyzing, and reporting financial transactions. In simple words, accounting not only includes recording and maintenance of accounting records but also includes the preparation of a summary of all the financial transactions over an accounting period, in the form of the financial statements.
To run a business profitably as well as to keep it solvent, it is highly important that the solvency and profitability of the business should be checked on a regular basis. For that, it is critical for the business and its stakeholders to know whether the business is generating sufficient profits or incurring losses, and whether it has enough funds to settle all its obligations. Accounting helps businesses in extracting all the aforementioned information, which in turn enables the management of different businesses to provide guidance regarding being profitable and sustainable in the long term.
After properly analyzing the information presented in the accounting statements, the users of the same take some important business decisions with regards to the future business operations/ activities. Since accounting is the main source of necessary financial information as well as non-financial information to some extent, it can be said that it actually performs a service function and at the same time it is used for representing an entity’s economic position. Therefore, it can also be said that bookkeeping is not the primary aim of an entity or a person.
On the contrary, the prime focus or aim of the accounting function is to help businesses and their stakeholders in making some very important business decisions on the basis of the information presented in the audited financial statements. Therefore, understanding an entity’s books is not the main objective; it only helps in realizing a specific aim or objective. Hence, it can be said that accounting is not the end but is actually a means to an end.
We in our daily life express ourselves as well as our feelings through our language. The same is the case with accounting, the results of different activities and operations are expressed in the form of financial statements. Accounting measures an entity’s financial performance through analyzing the entity’s balance sheet and profit or loss statement. Thus, the accounting language expresses each and everything about an entity’s financial matters as well as its non-financial matters to some extent. Therefore, the progress of any business entity can easily be seen and compared with the help of different accounting information/ data.
Accounting is called the language of business and just like other languages have specific rules and regulations which all the entities around the world are bound to follow or comply with. If an entity fails in following specific accounting rules diligently, then in such a scenario the business may get exposed to the risk of paying penalties for perjury, lying, or misrepresentation. Comparability of financial statements is integral for the effective functioning of the accounting language. At the same time, language should be flexible and adaptable in the context of a changing environment.