Accounting as a language of business , Accounting serves the responsibility of communicating financial information to a divergent group of users. so very often, this is commonly called ” the language of business”.
We know, language is the way of expressing our feelings to others & this includes various words, terms & grammar. Like this, Accounting has its terms [Debit, Credit], grammar [Double entry system]. So Accounting is, of course, a language. Now why of business Accounting as a language of business?
As accounting reports the financial affairs of the business enterprise [profit & loss, revenue & expenses etc.] to the users group [Both internal & external] with the help of financial statements. The users group can understand the accounting language only if they have the proper Accounting knowledge and a bit understanding of business Accounting tells about the financial health of the organization.
Using a double-entry system of accounting, accountants use the debits and credits in a general ledger to track money as it flows in and out of a business. They record each financial transaction in the General Journal, also called the “book of original entry”. From the journal, transactions are posted to the general ledger from which the Accountants prepare the income statement, Statement of changes in Owner’s Equity, Balance Sheet, and Statement of Cash Flows which provide a snapshot of a business’s financial condition.
As a language, accounting speaks of the operating performance in terms of profit or loss financial position and most importantly financial information to the decision-makers.
Let’s see how accounting communicates meaningfully;
A business entity always observes that there is not enough cash in the bank to pay bills. A quick look at the collection of accounts receivable revealed the face that customers paid on average two weeks after the tile stated in the terms of credit sale. The business then monitors collection from customers and after the monitoring, it observes that the bank balance rose to a point where it could pay its bill regularly.
The following information has been provided by the accountant regarding business entity’s profitability in the last three years:
|Return on equity capital||14%||11%||6%|
So the potential investors may not be interested in this business, as the financial health of the business is not sound enough to attract investment.
Look, in the first case, accounting communicates information meaningfully to the management (internal users) and in the second case; accounting communicates information to the potential investors (external users). In both the case, users can make effective decisions.
Accounting as a language of business means of communicating information about a business.