Why Accounting is Called the Language of Business
Enough with the metaphors already, Mr. Buffet. What do you mean by accounting is the language of business?
There are many theories about what this coined phrase means. But you don’t just want an opinion. You want an answer.
You want to learn from the master and successfully apply the principle to your business.
Well, we’ve done the research and in this post, we’ve broken down the analogy and explained how what he said can genuinely help you.
Ready? Let’s dive in.
Who Said it
When the masters speak, we listen.
- When Steph Curry talks about basketball, you listen.
- When Mariah Carey talks about hitting an upper vocal range, you listen.
- When Chris Farley talks about living in a van down by the river…you listen.
You’re here because you are interested in business.
So when Warren Buffet, one of the most successful businessmen and investors of all time, throws out a solid piece of advice about business practice, you listen.
“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business, and it’s an imperfect language. But unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements – you really shouldn’t select stocks yourself.” – Warren Buffett
Let that sink in for a moment…
“Unless you’re willing to learn the language, you shouldn’t be investing.”
We can take this principle one step further and say unless you understand the nuances of accounting, you shouldn’t be running a business.
What This Means For You
Are we saying that you have to be an accountant? No. You already have an accountant. But you need to at least understand general accounting terms.
So, suppose you want to improve your business practices and become more successful. In that case, you have to understand what Warren Buffet was talking about when he called accounting the language of business.
Here we’ll break down this famous quote.
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- What is a language anyway?
- How accounting is like a language
- Why you should learn this language
We’ll then bring this theory to life by throwing in suitable examples.
What is a language?
The Purpose of Language
A language is simply a tool used to express thoughts.
It can be rather complex and will take time to learn. But once you know the language, you can communicate with anyone around the globe who speaks it.
We usually think of language as a single concept – a set of spoken sounds categorized as English, Italian, Mandarin, or Klingon.
If we step back, however, we realize that language, a universal communication tool, is much broader. Language can be either written or oral or both. Music and art are just some examples.
Accounting, for the most part, has been standardized around the globe.
Numbers will ALWAYS add up the same way whether the one adding them speaks Portuguese, Farsi, or Canadian French.
Investors and CEOs can use this language to understand income, expenses, financial data, financial statements, and company value in the same way worldwide.
How Accounting Is like a Language
“Accounting is the language of business and you have to be as comfortable with it as you are with your own native language to really evaluate businesses.”
Learning the language of accounting is in some ways, literally like learning a foreign language.
#1 – It Requires an Investment of Time and Effort
Learning a new foreign language can take a massive amount of time.
According to the Foreign Service Institute (where U.S. diplomats go to get language training), the average English native speaker needs approximately 2,200 hours to get to an advanced level in Arabic! That’s 1.5 years of full-time courses. (1)
This might not be worth it if you’re living in your mom’s basement in central Iowa. But if you plan to live in Egypt for the rest of your life, you might want to start cracking open some books.
The point: It will take A LOT OF TIME AND EFFORT to learn the basics of accounting language before you can run a successful business.
But it is necessary and worth the effort.
#2 – Vocabulary
It has been said that if learning a language is like building a house, learning new words is like laying down bricks.
There are a ton of new words you have to learn before you can understand a new language. Like Hebrew to an English speaker, accounting has many terms, it even involves relevant business terminologies, that will sound foreign when you first encounter them.
You must learn the vocabulary unique to accounting, as well as their meaning, to use them effectively, and to be able to start communicating financial information.
- Accrual basis
- Balance sheet
- Trial balance
- General ledger
- Fixed assets
- Retained earnings
- Accounts receivable
- Financial statements
Anyone in charge of making decisions for a company’s finances must not only know what a balance sheet looks like but understand all of its individual components, business accounting functions, and how to read it.
# 3 – A Global Language
Just as love, art, and the lyrics to “Gangnam Style” are known across the globe, accounting is considered a universal language.
Numbers work the same way EVERYWHERE and understanding a company’s bottom line on a balance sheet does not need any interpretations across borders.
When global mergers or business deals occur, everyone can easily understand the financial aspect of any agreement by looking at financial reports.
This is true for any business deal, in the way that it is required by the International Accounting Standards Board (IASB) under the International Financial Reporting Standards (IFRS).
An investor might not fully understand the logistics of a specific industry. Still, they can tell whether investing in a business is wise just by investigating a company’s financial performance and routine business transactions.
You Need to Learn The Language
Although accounting is the language of business, many executives don’t speak it. (don’t listen, Mr. Buffet, they don’t mean it).
That’s why they pay an accountant to explain things to them. But carrying around a human “Google Translate” only takes you so far in the real world of business.
Leadership and strategic skills are invaluable career skills to recruiters.
If you want to sway other executives to respect you as a leader, agree or come up with a strategy for implementing your conclusions, you need to do more than assess a company’s financial position based on a cash-flow statement.
Understanding accounting documents will help you if you run your own business, observe legal and regulatory requirements, become a CEO, or go into sales finance.
When you learn about the company’s financial statements, you’re learning about business, its economic and financial information, and how to communicate results.
- Higher-level decisions require justifying and analyzing financial data.
- An executive will reference financial documents, accounting measures, and financial transactions from bookkeepers or accountants.
- But an executive who doesn’t “speak accounting” will be less effective in making business decisions because he won’t know what they’re looking at and what questions to ask.
The bottom line: Without knowing generally accepted accounting principles, executives will find it more challenging to make informed, intelligent decisions.
Take Your Business Into Your Own Hands
If you want to become a master of your craft, pay attention to what those who are successful in the line of business are doing.
In the business world, no one has been more influential or successful than Warren Buffet.
When he speaks, we should listen.
In a sentence, why is accounting called the language of business?
It takes effort to learn the ins and outs of accounting and financial statements.
But if you want to be successful in the business world, you need to learn (at the very least) the basics of accounting.
There are no shortcuts. No substitutes. Just hard work and tangible benefits.
Take the time to learn the language of accounting. If you invest in yourself by learning accounting 101, you are on the right track to becoming a success in the business world.
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