COLUMN: Stop and smell the business; accounting a practical skill

Tim Mak

To former successful money manager and now great philanthropist Charlie Munger, knowledge in accounting is important in understanding financial statements, business and investments. He thinks the subject in the form of an introductory accounting course should be made mandatory in one’s undergraduate education.

Business and investments have been important throughout history. But it’s becoming clearer in the last ten years or so. We have witnessed business entering into our living rooms, bedrooms, office and cars in the form of dedicated business channels and increasingly business savvy radio DJs. The smell of “business” is everywhere. To top it all off, the nation finally elected its first MBA President in 2000.

Furthermore, as our society progresses, the portion of one’s income taken up by the bare necessities is shrinking by the day. For example, while our great-great-grandparents might have spent a good 95 percent of their disposable income on basic, necessary food, clothing, shelter and transportation just to survive, arguably the average family of today probably need only spend 50 percent or 60 percent to cover those basic expenditures (note that we are not talking about designer clothes, fancy cars or brick mansions here).

Which means that modern-day investors, if they want to and have the gumption to do so, can save up, in percentage terms, many times more money than previous generations ever could. As we’ll argue later, for those willing and determined to do so, investments, at least in pure monetary terms, can and will be far more important than one’s job or career.

To be successful in investment, one needs a good grasp of business. To have a firm grasp of business, one in turn will need to at least understand the language of business. That’s accounting.

Obviously, many students outside of the business area think of accounting as a boring subject with debits, credits and numbers all over it. But it’s exactly those students, who don’t need accounting to fulfill their degree requirements, that perhaps need to learn accounting while in college the most. College is arguably the best (sometimes the only) chance they may have the time or the motivation (three-credit elective) to learn accounting.

A Nobel laureate nearing his retirement at a major private university insists every semester that the only course he teaches be the college introductory course in his subject. He says that students majoring in his subject area are generally already motivated in learning the knowledge he has to offer. It is the non-majors whose eyes he wants to open to the magic and power of the subject matter he’s endowed with. I think the same can be said of accounting.

Accounting is how businesses communicate with all the stockholders. And as investors, we can’t fully understand a business until we’ve befriended accounting.

With accounting knowledge under your belt, you’ll be able to read the annual reports, Form 10-Ks and general business reports about various companies and myriad industries in a different light. You’ll be excited by what’s going on in there, and how it relates to our lives.

As Munger suggests, investors should have a perpetual love for learning what’s going on in this world.

Tim Mak is a teaching fellow at the College of Business Administration and a columnist for the Daily Kent Stater. Contact him at [email protected].