Accounting – The Heart of Business

The purpose of a business – at least, any business without a non-profit designation – is to earn a living for the business owner and make a profit for the owner and investors. The purpose of a language is to communicate. If a business owner is to communicate with all that have a stake or an interest in his business, he needs a language to explain his business.

He needs to explain the performance of the business to stockholders and co-investors. He has to file tax returns that include forms describing in detail the activities of the business including cash flow, gross and net profits, deductible expenses and so forth. The only way to explain these things is with numbers, organized in a structure that all parties can understand. That structure, the sentences and paragraphs of the “language of business” is found in the rows and columns of accounting documents.

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The basics of accounting follow the cycles of a business through the course of a “fiscal year.” The end of that year may or may not be defined by the date federal taxes are due. In any case, the accountant begins with a general ledger that records business transactions. Debits and credits are recorded in detail or within a system that connects them to a record on each item kept elsewhere. At some point the general ledger is reconciled and a financial report is prepared.

The income statement reflects income and expenses, which define the company’s performance. The balance sheet shows the company’s position at any point in time by itemizing assets, liabilities and equity.

A cash flow statement will take the income and expense figures over time and provide cash flow projections based on anticipated sales and disbursements. From this, some degree of management evaluation can be made and decisions made on company business strategy moving forward.

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Accounting records business transactions and then manipulates the transaction records to develop tools of analysis. A business’s accounting also supports the annual tax filing that the business makes and the position taken on any number of business costs and expenses that are claimed as tax deductions.

In a public company there are many arenas for debate. In upper management with board members and among stockholders, business strategy is very much an open question. The records provided in a public company’s annual report and 10K filings provide the analytical tools to fuel discussion on business performance. Numbers take on strategic meaning and represent the wisdom and risk of various business decisions.

A premier example of substantial business risk is an acquisition. Before one company buys another, the process of due diligence provides for minute inspection of the performance turned in by the property for sale. That is to be found in those columns of numbers generated by the accounting department. The standards of accounting are found in agreement on its terminology and the structure of its documents. The language itself is composed of the numbers that fill those documents, and the message is the story they tell about a business’s economic performance.

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