Text I Accounting As the Language of Business

Before you read.

Consider the title. What do you know about the topic? Try to frame one or two thoughts of your own on the subject. Then read the text to find out:

1. Why is accounting often said to be the language of business?

2. How do we understand accounting in everyday life?

3. What is the purpose of accounting?

4. What are the major users of accounting information?

5. What is accounting?

6. What is accounting information required for?

7. What is an accounting system?

Accounting is often said to be the language of business. People associated with business, whether they are managers, owners, investors, bankers, lawyers or accountants use its data and therefore use accounting terms and ideas. As it is the language of business there are words and terms that mean one thing in accounting, but whose meaning is completely different in ordinary language usage. Fluency comes, as with other languages, after a certain amount of practice. The better you understand the language, the better you can manage the financial aspects of living.

In our everyday life we understand accounting as a language through which financial and economic information is collected, stored, analyzed, classified and finally, communicated to users. People use accounting information in day-to-day affairs to manage their bank accounts, to evaluate job prospects, to make investments, and to decide whether to rent or to buy a house.

The purpose of accounting is to provide economic information which permits users of that information to make informed judgements and decisions. Users of economic information require this knowledge to help them to decide how best to allocate available resources.

For accounting to serve its intended purpose, it is necessary to establish clearly who the major users of financial information are and what their needs are.

Some of the major users of accounting information are:

1. Owners of businesses. In order to make an investment decision, owners need to assess the likely future returns from their investment.

2. Lenders (banks). Like owners, lenders are interested in likely future risks and rewards, and in the efficiency of management.

3. Suppliers of goods and services. Suppliers of goods and services need to ensure that a business is able to pay for the goods and services provided.

4. Management. Managers make different kinds of economic decisions and will require different kinds of accounting information.

5. Governments. Governments may require information concerning a business for different reasons. They use information on profits for taxation, for regulation the activities of certain businesses and for pursuing anti-monopoly policies.

Accounting is the systematic development and analysis of information about the economic affairs of an organization or any business. Accounting shows a financial picture of a business. An accounting department records and measures the activity of business. It reports on the effects of the transactions on the firm’s financial condition. Accounting records give a very important data.

For management of any company to be efficient, extensive and accurate accounting information is required. In order to provide such useful information we need some means of keeping track of the daily business activities and summarize the results in accounting reports. The methods used by a business to keep records of its financial activities and to summarize these activities in periodic accounting reports comprise the accounting system. The first function of an accounting system is to create a systematic record of the daily business activity, in terms of money. For example, goods and services are purchased and sold, credit is extended to customers, debts are incurred, and cash is received and paid out. These transactions are typical business events which can be expressed in monetary terms, and can be entered in accounting records.