In this video I share my definition for accounting. Check it out!
What is accounting? This is an interesting question, because accounting is a broad field. You have tax accounting, managerial accounting, financial auditing. The question is whether there is a common description to describe the umbrella of accounting.
Now I have made some related videos, on “The Difference between Finance and Accounting” and “What is Finance.” But in this video I want to focus on accounting, because accounting is something very special.
Now accounting is typically described as the language of business, or the communication of financial information. I would like to suggest a broader definition of the field of accounting. Accounting is the study of finding structure in chaos. Now this I realize this definition may be a little different from what you find in textbooks, but it is helpful to explore this idea.
The world is chaotic. We can all recognize that. Economies are huge numbers of people making deals and exchanging currency. If you have ever worked in a business with more than 5 people, things get incredibly complex very quickly. So let’s look at what an accountant does. They come in and they create structure from the chaos. They capture each economic transaction in a structured way called a journal entry. They record those journal entries in a structured way through a book-keeping system. They report activity in a structured way through financial statements. They report taxes in a structured way to the IRS. And they undergo an annual financial audit to attest to the credibility of their accounting structure. Everything an accountant is doing is taking the chaos of business and putting a structure to it.
Look at the word accountant. What you see in the word is “count.” So you have an army of accountants around the world counting things. Let’s think about why this is so important. Humanity needs structure to understand the chaos of the world. So we have all these people counting things and putting numbers into spreadsheets. Because of this, everyone has a better understanding of what is going on. And that allows people to make business decisions. Imagine walking into a busy factory building with 100 workers. Just by looking around, would you be able to tell if the factory is profitable or not? No! You can’t tell that by just looking at the world. But spend 5 minutes with the accountant, who spends all their time counting the things going on in the factory, and you have a very good idea of if they are making money or losing money. So what accountants are doing is providing this understanding of the chaos of everyday life.
The most important aspect of this counting is productivity. Because of accountants, every person and every business has a certain level of productivity that can be quantified. So we can go throughout the world and gauge productivity based on people’s financial statements. This enables us to tell who is creating value and who is not. That tells us who we should give money to and who we should not.
So I want to come back to the definition. Accounting is the study of finding structure in chaos. This is such an enabling idea. From a practical standpoint, accounting is just going around counting things. That is your job, to count things. But from a theoretical standpoint, it is enabling understanding of productivity in economies and enabling markets to function.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.