Accounting: The Language of Business

Jan 25 / Jordyn Hrenyk
“At its core, accounting is about displaying key information so that everyone who speaks the language, can understand it.”

Back in business school, I had this accounting professor who started our first class with a speech about the idea that accounting was the “language of business.” She said that no matter what area of the business you ended up working in – whether that was human resources, marketing, strategy or anything else, accounting would be the language you spoke in inter-departmentally and with external stakeholders. This professor claimed that accounting was so central that is was essential for everyone in business to learn – even those that had no intention of becoming an accountant. At the time I thought this was a bit egocentric, or at the least, accounting-centric. I figured that she, like most of my professors, was trying to tell us that her subject was the most important of all business subjects to try to get us to focus on our accounting assignments. However, now that I work closely with new entrepreneurs as they set up or grow their businesses, accounting comes up a lot more often than human resources, marketing, strategy, or any other single area of business. This isn’t to say the other subjects aren’t important or that we don’t talk about them carefully, it’s just to say that accounting actually is a key issue that many entrepreneurs don’t know how to face on their own, or don’t have the confidence to face alone.
As a business owner, you interact with many stakeholders, but maybe none more intimidating than the national government or the CRA. This is because many business owners don’t speak the same accounting language that these government representatives often do, or read the language the forms are written in. I won’t go so far as to say accounting is the most important part of any business, but it is an area – practically its own language – that business owners need to learn to speak about with confidence and competence.

When I was in business school I thought I didn’t like accounting; it seemed finicky and, frankly, boring. I thought I didn’t like accounting because I had never given it a real chance. Before my first accounting class, I had already heard so much about its meticulous rules and tediousness that I dismissed it early on. It wasn’t until my third, upper-level, university course that I really started to appreciate accounting and it wasn’t until I started working with new entrepreneurs that I recognized the widespread lack of financial literacy in our culture – even among business professionals.

Time and time again, I’ve heard entrepreneurs from any industry admit that accounting is their weakest business skill. I’ve talked to some very successful entrepreneurs who note that when they started their business they had absolutely no knowledge of accounting concepts or the accounting jargon. But over time, owning a business has forced them to either take accounting classes or to hire someone to help them manage their accounts. Eventually these entrepreneurs had to rely on other people to help them learn about their own businesses.

That’s one thing that accounting really can do for us – it can help us learn a lot about an organization. Accounting can help us understand the past, present and even future (to a degree) financial health of a company. Publicly held companies are required to publish a certain set of financial statements each fiscal year [if you’re already getting lost in the lingo, don’t worry – we’ll go through it all together!] and these statements can tell you more than just how much profit the company made last year, They can tell you with some level of certainty whether or not the company is expanding, whether the new products are selling well, whether the company is going to give out dividends to shareholders and much more. They say the devil’s in the details and that’s certainly the case with accounting. The better you get a reading through the details of the financial statements, the more informed you’ll be. Of course, a business can certainly make mistakes or intentionally mislead readers of their financial statements (*cough* Enron *cough*) but for the absolute, staggering, overwhelming majority of businesses, the statements are a way to inform their stakeholders, not mislead them.
There are different types of accounting and certainly a variety of jobs within the accounting sector, but for the new entrepreneur, the two most relevant types of accounting to understand (and most of you will only need to understand them at a shallow level) are: financial accounting and managerial accounting.

Financial accounting is all of the nitty-gritty stuff that we often associate with accounting. It encompasses the production of the year-end financial statements and it, overall, is the foundation of the subject. In each nation there are only one, two or a few ways of doing the common work in financial accounting. In Canada we have GAAP (Generally Accepted Accounting Principles, which can still be used by some businesses) and we have IFRS (International Financial Reporting Standards). While these two systems do not govern every single aspect of financial accounting, they are at its core.

Managerial accounting is less “cut-and-dry” than financial accounting. What I mean by this is, while there are only a few ways to solve a major problem or create a statement in financial accounting, in a way managerial accounting exists uniquely for each organization. This is because managerial accounting is focused on producing statements/reports internally in a company; the statements produced in this area of accounting are not generally for public consumption, just for employees only. One key facet of managerial accounting is producing proforma financial statements. These are predicted or forecasted financial statements; while they mirror those created under financial accounting, there are more major assumptions in the proforma statements – because we’re talking about the future – that make them generally less reliable. Furthermore, managerial accounting allows a business to estimate its costs before or during the year. While financial accounting can tell you exactly how much you spent on raw materials last year, managerial accounting uses that information to help you figure out how much you will spend next year.

Accounting really is a language; like most professional fields, accounting is curtained by jargon and confusing language that makes it less accessible for non-accountants. Thinking of accounting as a new language might help you to understand its purpose: at its core, accounting is about displaying key information so that everyone who speaks the language, can understand it – this is also a key principle of language in general. The language barrier is what often intimidates new entrepreneurs. While they may have an understanding of accounting concepts, they may get lost in the language of statements and reports, However, like a tourist with a phrasebook, we can learn a few key terms from accounting and begin to explore the world of accounting in greater depth.

Accounting-to-English Phrase Guide
Profit: The amount of revenue left after all expenses, taxes and other deductions are subtracted from it.
Revenue: The money that a company receives during a year. There are different kinds of revenue like rent revenue (money a company gets for renting out extra office space, trucks, etc.), sales revenue (money a company gets from selling its primary services/products), investment revenue (money a company gets from investments it has made). Usually refers to sales revenue.
Cash: Funds accessible to an organization on very short notice ( also called “cash and cash equivalents”).
Accrual: A methodology of accounting that ensures that revenue is recognized when it is earned (ie: when the work you’re getting paid for is completed) and it ensures that expenses are recognized when they are incurred (ie: when the bill arrives in the mail), rather than waiting until you actually pay the bills in cash.
Shareholder: Entities (people or other organizations) that own part of the publicly held corporation by way of shares or stocks.
Margin: In a general business context this means something to the effect of “by how much this amount of money is greater than this amount of money.” You might hear profit margin (basically just the amount of profit), operating margin (amount of revenue left after operating expenses are deducted), gross margin (revenue less cost of goods sold), etc.
Asset: Property that the entity owns that has can provide value to the organization; it can be used/sold to meet debts or obligations.
Liability: Obligations that an entity has to pay, provide services or transfer assets to another entity that have arisen from previous transactions; basically, they are obligations to pay someone or to provide someone with service/products.
Debt: Money that has been provided to an entity by an investor with the obligation of repayment in cash; money that is owed for the borrowed money.
Equity: Money that has been provided to an entity by an investor in exchange for shares/ stocks/ part ownership of the company.
Income Statement (statement of profit and loss): A statement that covers one year; it shows the revenues and expenses that a business incurred and ends with the calculation of profit (net income).
Balance Sheet (statement of financial position): Financial accounting statement that acts as a “snapshot” of the organization’s accounts. It shows readers the entity’s assets, liabilities and owner’s equity. It’s called a balance sheet, because the assets must be equal to the liabilities + owner’s equity.
Cash Flow Statement: A relatively broad look at when and where all of the cash was spent and earned for the year. While the income statement deals with accrual accounting, the purpose of the cash flow statement is to tell you the same sort of story but on a cash basis. It reconciles profit to cash on hand at the end of the year.
Shareholder: An investor that has purchased, was given or gifted stocks/ shares/ part ownership of an entity.
Dividend: Amount paid out by the corporation to its shareholders.
This phrase guide is by no means the only accounting language you need to operate in this realm effectively, but I think it’s a good start of some of the most essential terms.
There’s a reason why we refer to accounting knowledge as “financial literacy.” Learning to read financial statements and reports really is like a new language. But like any language, the key to mastering it is continuous, informed exposure. Practice makes perfect and the more that you interact with accounting statements’ language, the more you will start to pick it up. I’ve provided you with simple tools for interacting with accounting, use the tools like any other language student to interact with other material on your own. Read through financial statements – any large public company has to make them available, and may privately-held corporations will make them available as well (I’ve linked to a few below ) and pick out what you can from them. Even if you don’t understand all of what you’re reading, try to decipher what you can and really immerse yourself in the language.

Links:
http://www.kakivak.ca/data/UPLOADS/files/Annual_reports
/2015_Annual_Report_English.pdf

http://about.telus.com/investors/annualreport2015/files/pdf
/en/ar.pdf
http://annualreport.cibc.com/pdfs/cibc-ar-15-en.pdf
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