It has become a cliché to say that accounting is the language of business. That metaphor is helpful because it emphasises that accounting conveys vital information about business. But the metaphor can be unhelpful because, although accounting is a system for conveying information, accounting lacks most features of real human languages, such as Arabic, Chinese, English, French, Russian and Spanish.
In this post, I look first at the components of real human languages and the functions those languages serve. I then look at whether accounting has the same components and whether it serves the same functions.
Real human languages have various components, including:
- a vocabulary or lexicon—a set of words;
- syntax—a component that assembles words into phrases, clauses and sentences;
- morphology—a component that changes words to reflect their role in phrases, clauses or sentences. An example in English is changing walk to its past tense form walked.
- semantics—a component that determines the meaning of words, phrases, clauses and sentences;
- phonology—a component that specifies how to pronounce words (and phrases, clauses and sentences).
Nowadays, most languages also have orthography—a system (wholly or partly specific to the language) for capturing the language in writing.
Human language can be used for many functions, including making statements, asking questions, negating statements explicitly, issuing directions, expressing feelings, creating fiction (eg stories or poetry), making jokes and playing games.
What is accounting?
By accounting, I mean providing information by means of recognition in primary financial statements. Recognising an item in one of those statements involves:
- depicting that item —either alone or in aggregation with other items—in that statement both in words and by a monetary amount; and
- including that amount in one or more totals in that statement.
Each item depicted in a primary financial statement must be one of 5 ‘elements of financial statements’, or a sub-class of one of those elements. The IASB’s Conceptual Framework for Financial Reporting identifies the 5 elements and their names:
- 3 elements relating to financial position (assets, liabilities and equity).
- 2 elements relating to financial performance (income and expenses).
The 5 elements do not stand alone. They interact to form a tightly interlocking system:
- total assets = total liabilities plus total equity (the ‘accounting equation’)
- income and expenses are changes in the carrying amount of assets or of liabilities.
Examples of sub-classes of the elements are:
- assets: cash, trade receivables, inventory, investments, machines
- liabilities: trade payables, bank loans received, tax liabilities
- income: revenue, interest income
- expenses: employee costs, depreciation
In the rest of this section, I look at:
- the vocabulary of accounting
- the lack of syntax in accounting
- the function served by accounting
- other components
- language in the notes
Vocabulary of accounting
Accounting has only a limited vocabulary, consisting of names for the 5 elements and for sub-classes of some of those elements. Some of those names (and their definitions) appear in IFRS Standards and in the IFRS Taxonomy.
Unlike human language, the vocabulary of accounting contains only nouns (names). It has no words of its own for, for example, verbs, adjectives, adverbs, prepositions, conjunctions or interjections—though occasionally some nouns in the accounting vocabulary include components drawn from the vocabulary of a human language.
The names forming the vocabulary of accounting are often drawn from the vocabulary of the related real human language, though in many cases their use in accounting is more specialised.
Accounting lacks syntax
Real human language has syntax that assembles words into phrases, clauses and sentences. Syntax is, arguably, what distinguishes human language from all other forms of communication.
Accounting involves no syntax. For the limited range of items for which accounting’s vocabulary provides names, accounting simply depicts them in words and numbers in the primary statements and includes the numbers in totals (and, often, in sub-totals). Accounting depicts:
- assets, liability and equity in the statements of financial position (balance sheet).
- income and expenses in the statement(s) of financial performance (statement of profit or loss, statement of other comprehensive income).
- movements in equity in the statement of changes in equity.
- movements in one asset (cash) in the statement of cash flows.
There is some very limited flexibility to determine the sequence and grouping of sub-classes recognised on the face of the primary financial statements, but that flexibility is constrained tightly by the inherent structure of the statements. That flexibility does not come close to what syntax creates in real human languages.
Function served by accounting
Accounting can only be used for one function—making statements, and only statements that:
- the company had particular types of asset, liability; or
- the carrying amounts of the company’s assets, liabilities or equity changed in particular ways (by particular types of income, of expense or of cash flow—or by contributions from, or distributions to, holders of the company’s equity).
Those statements convey important information. That information is fundamental to assessments of a company’s financial position and financial performance.
Accounting cannot be used for the many other functions served by human language, such as making a broader range of statements, asking questions, negating statements explicitly, issuing directions, expressing feelings, creating fiction, making jokes and playing games.
Accounting does not have (and does not need), the other components of real human languages:
- accounting does not need a semantic component. All words used in its limited vocabulary are names for subsets of one of the 5 elements. And accounting does not need a semantic component to determine the meaning of phrases, clauses or sentences because accounting has no syntax to assemble them from the words in its limited vocabulary.
- accounting does not need its own morphology, pronunciation or orthography, it simply uses the morphology, pronunciation or orthography of the human language in which the financial statements are written.
Language in the notes
Financial statements include not only primary financial statements but also notes. Some of the information contained in notes is a breakdown by sub-classes of asset, liability, equity, income or expense reported on the face of a primary financial statements. The breakdown could have appeared on the face, but was relegated to the notes, probably to avoid cluttering the face of the statement. That breakdown is part of accounting as I have defined it for this post.
The notes also disclose other information:
- about a sub-class of one of the 5 elements, but going beyond the name and carrying amount of that sub-class and a description of how that carrying amount was determined; or
- that is not directly about any sub-class of one of the 5 elements.
Although that other information can be very important, it is not part of accounting as I have defined it for this post. To produce and convey that information, companies use a real human language (for example, English if the financial statements are in that language). Similarly, information in management commentary is written in a real human language, not provided through accounting.
Accounting conveys important and disciplined information about a company’s financial position and financial performance. But although that information is important, that fact does not make accounting into a language. Unlike real human language, accounting :
- has a very limited vocabulary and has no syntax to assemble words from that vocabulary into larger items, such as phrases or sentences.
- serves only one single function, although that function is very important.
When companies need to convey information going beyond the limited (but important) information that accounting can convey, they need to use a real human language, for example by giving further explanation in the notes or in management commentary.
I have concluded before that another system for conveying information—bidding in the card game Contract Bridge—is just a code and not a real human language. That is because bidding in Contract Bridge has a very restricted vocabulary and no syntax. https://languagemiscellany.com/2022/05/the-language-of-contract-bridge/
This post Accounting is not a Language also appears on my accounting blog Accounting Miscellany https://accountingmiscellany.com/