Question

Why is accounting called the language of business?

Answer 1

Accounting is called the language of business as it enables the managers of a business or an organization to communicate its financial and economic information to different external parties and users of financial statements. External parties and users of financial statements rely on the accounting information that is provided to them in statements like income statement and balance sheet to make various decisions. For instance creditors can use the accounting information to determine the credit worthiness of a company and its debt paying ability to determine the amount of loan or credit to extend to the company. Stockholders can determine the intrinsic value of the company’s stock and hence can base their investment decisions (whether to increase their exposure or decrease their exposure) on that basis. Accounting information will be used by both current investors as well as potential investors.

Accounting helps in recording different economic events that take place within a company and hence it leads to recording, classification and summarization in the form of financial statements. These financial statements are used by both managers (for decision making like capital budgeting) and by external users as well.

Besides being of use to current and potential investors and to creditors the accounting and financial information is also used by vendors and suppliers, customers and government agencies like tax authorities and regulators, employees and trade unions (for the purpose of salary negotiations) and competitors (for benchmarking purposes).

So accounting is the language of business as it helps in communicating information regarding the financial health of the company to different stakeholders who use them to extract useful information.

Answer 2

Accounting provides information that is useful in making decisions by all participants in the market for resource goods and services, both profit-oriented and nonprofit oriented.  Because accounting’s role is so important, it is often called the language of business.