Why is accounting referred to as the “Business Language”?

November 4, 2021

Accounting is sometimes referred to as the language of business since financial records and accounting reports tell the tale of how a firm is performing financially. 

Financial statements are frequently mentioned by CEOs and decision makers while discussing the health of their companies. Financial records include income, expenses, debt, and liabilities, all of which must be understood by anyone who wishes to communicate coherently in the business sector.

Warren Buffet, the chairman and CEO of Berkshire Hathaway, is credited with coining the phrase “accounting is the language of business” during a CNBC interview and phone discussion with a 17-year-old investment intern. 

Buffet advised the young man to acquire accounting terminology because it was the most effective approach to learn how to read financial figures. As with any foreign language, Buffet indicated that it takes time to master all of the fundamentals and integrate them into one’s comprehension and usage, but that it is eventually a key determinant in economic success.

Accounting 101 Terms

Accounting, like every other language, has its own collection of terms. Those in significant financial roles in a company must grasp accounting language and, more precisely, the meanings of unique phrases in order to apply them correctly and effectively on a regular basis. 

Accrual basis, diversification, a balance sheet, a trial balance, and a general ledger, for example, are all popular accounting words that not everyone understands. Anyone in charge of a company’s financial direction must not only be familiar with the appearance of a balance sheet, but also with its different components and how to read it.

Accounting Functions Create the Language

Accounting departments conduct the responsibilities that serve as the foundation for all financial business communication within a corporation. Accountants and bookkeepers record and track vital financial data on a daily, weekly, and monthly basis. 

The entry of these everyday business transactions into a company’s records, as well as the ongoing monitoring that takes place in the form of reports, provides vital financial data that helps management make decisions. For example, they may decide to increase spending to stimulate growth or reduce spending owing to a lack of funds.

It’s critical to have a firm grasp on the accounting system, how it functions, and how the financial statements all go together. Accounting terminology is crucial to comprehend in any firm, but far too few individuals do.

Three main financial statements are produced by businesses:

  • Balance sheet
  • Income statement
  • Cash flow statement

Each financial statement contains a broad list of terminology that are crucial to comprehend. Our free courses on: can quickly cover the language of business in accounting.

  • Fundamentals of accounting
  • Financial Statements Analysis

Businesses require a system for measuring their total financial status, which includes revenue, expenses, capital, and other variables. Companies can track these things and disseminate the results to a wide range of interested parties thanks to the rules-based accounting system.

Accounting on a Cash Basis

The cash basis accounting system tracks income when cash is received and expenses when bills are paid in some businesses. This strategy is simple to use, but it may not present the most realistic financial picture because income and related expenses may not be properly matched. 

In the case of insurance, a payment to the insurance company is reported in the month it is made, but it only covers half of the yearly insurance due. This allocation may be correct in terms of cash, but it does not reflect an appropriate estimate of expenses in relation to monthly revenue.

The Language of Finance

The language of finance is closely related to accounting. Finance analyses the facts and information offered in accounting papers so that company decisions can be made. 

While accounting organizes historical data from a company’s operations, finance as a discipline analyzes the information gathered, looks to the future, and makes recommendations and judgments based on what appears to be a prudent and profitable course of action. Finance professionals must not only be able to decipher accounting jargon, but they must also be able to ask the proper questions. What do specific numbers, for example, actually mean? 

Most organizations have a big overhead charge, but is that expense allocated or divided over all of the company’s products, or is it portrayed as a single large cost? Understanding the meaning behind the statistics is critical to speaking the business language properly.

Accounting’s rules-based approach is important for providing accurate, consistent, and reliable data, but it doesn’t always show where value is created or lost. The main language of finance is based on determining ways to optimize the firm’s value through analyzing value, rates of return, and looking into the future.

Consider the following examples of financial jargon:

  • Assessing value
  • Observing the future
  • Return on investment rates
  • Capital allocation

Finance is a crucial business language to overlay on top of accounting in order for managers to make decisions in the face of uncertainty.

A Universal Language

Accounting, like love and music, should be seen as a universal language. Numbers work the same way everywhere, thus understanding a company’s bottom line on a balance sheet does not need cross-border interpretation. 

When worldwide mergers or corporate deals occur, the parties involved can quickly grasp the financial components of the transaction by reviewing financial data. This is true for any commercial agreement, whether it’s between industries locally or between people looking to invest in a new venture.

An investor, for example, may be unfamiliar with the specifics of a certain industry, but by examining a firm’s financial records, they should be able to determine whether or not the company has the potential to be a sound investment.

Final Thoughts

More and more businesses are expanding globally, with 70 percent of all business transactions currently taking place across borders. Because the internet has made international trading easier than ever before, allowing for significant growth, it’s clear to see why so many businesses are opting to expand internationally.

You will need to adapt to effectively launch your firm in other countries, and being able to communicate with your customers is a critical component of going global. Employing international personnel or learning business languages yourself can provide your company with numerous advantages.