Accounting is the language of business because it helps people, both internal and external, to understand what is happening inside of s business. Just as language is universal to people, so is accounting in business. Regardless of where in the world a business is located, financial information is interpreted in the same way.
Experts use accounting information to assess how a business is doing. Financial documents, such as balance sheets, expense reports and audits, allow accountants to follow money and transactions. They use the data found in accounting documents to determine whether a business is financially solvent.
Investors use the information to determine whether they want to invest in a business. Accounting documents allow them to measure performance using ratios, such as inventory turnover, liquidity and stock performance. Without the knowledge of basic accounting principles, it is impossible to make smart decisions about investing.
Even governments use accounting to understand what businesses are doing with their money. Each year, corporations are responsible for paying taxes. The Internal Revenue Service (IRS) uses accounting methods to determine the right amount of taxes they must pay. If the IRS desires to find out more about a business and whether or not its accounting documents are accurate, they conduct an audit.