Why Is Accounting Often Referred to As the Language of Business?

by Contributing Writer; Updated September 26, 2017
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Accounting is the language of business for several reasons. Without accounting, business would be kayos. There would not be any indicators of how well a business was doing other than the cash on hand at that given time; however, that information would be short sighted.

Accounting Fundamentals

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Accounting is the gathering, classifying and recording of business financial transactions. This process is necessary in order to keep the business running smoothly. Accounting is the language of business because the dialect of business is money. Accounting is the organization of monetary information.

Financial Statements

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Accounting data is used to produce financial statements. The financial statements tell the story of how well the business is doing in terms of profit or loss. They communicate the financial information that is necessary to make sound business decisions.

Ratio Analysis

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The financial data can be analyzed to determine the status of the company’s ability to pay its short- and long-term debt. The information can be analyzed to determine the company’s liquidity, solvency and debt levels. These indicators are critical in determining the business’s ability to continue operations into the future.

Equity

Accounting is the language of business because it tallies the results in terms of owner's equity. The owner's equity is the amount of business that is owned free of liability. This is important for determining individual worth. The liabilities are subtracted from the assets, and the difference is the owner's equity.

Managerial Accounting

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Accounting data can be used to determine whether a company is making efficient use of its resources. The data can be analyzed and manipulated to determine whether a company should make or buy parts or raw materials. It can be used to evaluate whether a company is on budget. Variance analysis can determine if your labor hours, cash, raw material consumption or clock hours are over or under budgeted levels. This allows a management team to alter the input in order to achieve satisfactory results.

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