“Accounting is the language of business.”
That adage has graced many introductory accounting course notes and while it might seem like just a cute and contrite way to get a reader’s attention, it hints at the great variety of what accountants do. To continue the metaphor, imagine that a hospital, a trucking company, a hair salon, a tool and die manufacturer and a consulting firm are having a conversation.
First question: Does that really happen? In fact, it happens all the time! Businesses of all kinds, shapes and sizes constantly interact in product, service, labor, management, finance and regulatory markets. They engage in trade, makes sales, hire workers, attract financing, make investments and pay taxes to and from similar pools of resources.
Second question: What language do they speak? It is not good enough to say that they speak English, French or Swahili because how does an X-ray image compare to a coupe de cheveaux (French for “haircut”) or gari (Swahili for “car”)?
Accounting is considered the language in which businesses speak because it:
- provides a standardized vocabulary for an ever-expanding variety of economic transactions (“revenue,” “selling expenses,” “cost of goods sold”, “inventory”, “assets,”…),
- defines grammatical rules for the treatment of those transactions (“Generally Accepted Accounting Principles,”…) and
- establishes literary forms for the presentation of aggregated economic information (“The Balance Sheet,” “The Income Statement,”…)
In that way, accounting is journalism for economic activity. Clear, descriptive, purposeful and reliable journalism helps communicate what is going on in the world. Similarly, clear, descriptive, purposeful and reliable accounting helps communicate what is going on in a business. No matter what your business activity (i.e. helping patients, shipping goods, cutting hair, manufacturing, consulting), good accounting will help you communicate with your stakeholders (employees, customers, suppliers, owners and community) to get the resources you need to successfully operate your business (labor, sales, purchases, financing, public goods). On the other hand, bad accounting, or bad economic communication, might prevent you from getting the resources you need to succeed.
What is a good business idea without accounting? The same thing as a good story idea without a language: Just an idea.