BLOGS

January 23, 2017

Do you really understand the language of business?

Hello laymen and laywomen,

In case you are unsure as to what I meant, that is how we – the accounting elite – refer to all of you ordinary human beings, who don’t understand the complex art and science of accounting. Yes, accounting is both art and science. And yes, it is complex. And if you don’t understand it and are unable to discern that thin grey line where the science stops and the art begins, it follows that you won’t understand the most important language of business. If it seems like I’m exaggerating, listen to the great business guru Warren Buffet:

“Accounting is the language of business, and you have to learn it like a language… To be successful at business, you have to understand the underlying financial values of the business.”

Though there are people out there who are “in the know” propagating the idea that accounting is deliberately made overly complex by us avaricious accountants so that we can amass large amounts of money; don’t buy into that slander one bit. Accounting is complex because the underlying business that it is trying to capture is complex, period!

So that the true complexity of ‘accounting language’ can be better appreciated, allow me to establish here some ‘advanced’ basics of accounting.

Have you heard of GAAP and ever wondered what that means? GAAP stands for generally accepted accounting principles. In simple terms, GAAP provides guidance on the 5W1H* questions for accounting of just about anything under the sun. For instance, say you were to ship 10 widgets to a customer (note: I honestly don’t know why we accountants speak in context of widgets when we give examples, but that appears to be the convention followed, so I will adhere to it). In this example, the question arises as to when it is appropriate to record the sales – is it when: – The order is received, – The order is confirmed, – The goods are shipped, – The goods are delivered, or – The money is received?

Vexing question, isn’t it? Accounting standard on revenue will give you guidance on what needs to be done. Mind you, this is a very simple example. Accounting standards on revenue will also tell you how the revenue should be measured, how it should be presented in your company’s financial statements, what details should be disclosed about it and so on. A typical GAAP will have accounting standards on a plethora of areas such as inventory, share options, derivatives, agriculture, intangible assets, government grants, leases and so on and so forth. I’ve deliberately mentioned a mix of topics here to give you an idea of what comes under the umbrella of accounting standards.

Not so long ago, in a non-globalized world, many countries developed their own individual GAAPs. Like everything else homegrown, they all had their own distinct quirks, tastes and flavors. These worked reasonably well until globalization introduced the need for a common business language so we could all better understand each other. Unlike cultures or cuisines where the regional differences made the world a richer and more interesting place to live, the differences in accounting proved rather limiting for global trade and investments. How do you compare the profits of two similar companies based in two different countries when you know that they have not been calculated in the same manner? How does one make decisions based on such inconsistent information? This inconsistency necessitated some lengthy and painful reconciliation exercises to be done when, say for example, a company based in Europe wanted to list its shares in the US.

Enter the International Accounting Standards Board (IASB). IASB (and its predecessor body) brought in a set of accounting standards for global application (known as International Financial Reporting Standards or IFRS) and is still developing more and more of them. A large number of countries have now either adopted IFRS or converged their own national GAAP with IFRS. This process is still an ongoing one.

And all these GAAPs are by the way, just relating to external financial reporting (i.e. reporting to parties outside the company such as shareholders, banks, etc.). The information that management requires to run their businesses may be different from what the external parties need and invariably much more detailed – and that brings other concepts such as management reporting, cost accounting etc. into play.

And underlying all this is the bookkeeping function – the function that ensures that all transactions in a company are recorded accurately, completely and to the required level of detail. Those records then form the basis of further synthesis and analysis and reporting. Suffice it to say that a flawed bookkeeping function cannot deliver reliable outcomes and reports. Garbage in, garbage out – as we accountants are fond of repeating every now and then.

So where is the art and where is the science in all of these? That’s what my next column is going to be about.

And of course, if you’re struggling with any aspects of capturing, understanding and making sense of this important language of your business, know that you are not alone. It is a common enough affliction and that’s why firms like ours are in business. Regardless of whether you’re a small, mid-sized or large company, or whether you’re a start-up or well-established, we’re just a phone call or email away if you need any guidance, support or assistance with any aspects of accounting. In fact, call us even if you are not sure what it is exactly that is bothering you. We’re experts in diagnosis, detection, prevention and treatment of all your accounting issues. We promise not to act elitist when we speak to you. We will step down to your level, and won’t show our innate arrogance and “know-it- all” attitude one bit! In fact, our modesty will blow your minds away – just give us a try.

Till the next one,

Cheers!

Nish

This is the first part of a series. For Part 2, please go to The Science of Bookkeeping. 

For Part 3, please go to Creativity and Art in Accounting. 

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