Why did Warren Buffett say, 'Accounting is the language of business'?

Why Does Warren Buffett Say "Accounting is the Language of Business"?

Warren Buffett has repeatedly emphasized in his shareholder letters that "accounting is the language of business" because accounting provides a standardized, systematic way to interpret and communicate a company's financial information, much like language is a tool for human communication. Here’s a detailed explanation:

1. Accounting as a Communication Tool

• The business world is complex and dynamic. Companies express their operational status, profitability, and risks through financial statements (such as balance sheets, income statements, and cash flow statements).
• Buffett believes that without accounting knowledge, one cannot "understand" a company's story. Just as failing to grasp a language prevents comprehension of a conversation, investors who overlook accounting may misjudge investment opportunities.
• For example, in Berkshire Hathaway’s annual reports, Buffett frequently uses accounting data to analyze company value, emphasizing how accounting helps him identify "moats" (competitive advantages) and potential risks.

2. The Role of Accounting in Investment Decisions

• As an advocate of value investing, Buffett relies on accounting to assess a company’s intrinsic value. Accounting data reveals true profitability, asset-liability conditions, and cash flow health.
• He has warned that surface-level data can be manipulated (e.g., GAAP vs. non-GAAP metrics), requiring a deep understanding of accounting rules to "translate" this information and avoid being misled.
• In his 1980s shareholder letters, Buffett stated: "Accounting numbers are the beginning, not the end." This underscores that accounting is the starting point for investors to build a comprehensive understanding of a business.

3. Why It’s Crucial for Investors

• In a globalized business environment, accounting standards (such as IFRS or U.S. GAAP) serve as a "universal language," enabling cross-border comparisons of companies.
• Buffett advises beginners to start by learning accounting, as it is the key to successful investing. He himself successfully invested in companies like Coca-Cola and Apple by analyzing financial statements.
• In short, this metaphor reminds us that mastering accounting equips one with the "grammar and vocabulary" of the business world, leading to informed decision-making.

By understanding accounting, investors can, like Buffett, gain insight into the essence of business from numbers and avoid following the crowd blindly.