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Introduction to Accounting
ACCT1000

Custom publication for Curtin University

Prepared by Wahseem Soobratty
Ratio interrelationships 343
Limitations of ratio analysis 346
Summary of learning objectives 348
Key terms 351
Questions 352
Chapter 10 Accounting information
Credit and electronic banking 374
Safeguarding and managing cash 375
Bank reconciliation 378
Managing and monitoring cash 387
Summary of learning objectives 395
Key terms 396
Questions 396

system and internal control 363 References 405

Internal control systems 364 Acknowledgements 409
Principles of internal control 364 Index 414
Cash and credit transactions 372

vi contents
1
Introduction to accounting
Lo learning
After studying this chapter, you should be able to:
1. explain the process of accounting and
objectives the differences between accounting and
bookkeeping
2. outline the role of accounting in decision
making by various users
3. explain the differences between financial
accounting and management accounting
4. explain the current standard-setting
framework and the role of the professional
accounting associations in the standard-
setting process
5. evaluate the role of the Conceptual
Framework, illustrate the qualitative
characteristics of financial statements and
understand recognition criteria
6. give examples of the limitations of
accounting information
7. provide examples of new and exciting
opportunities in the accounting
discipline
8. define the term ‘sole trader’ and discuss
the main features of a sole trader
9. discuss the advantages and disadvantages
of a sole trader
10. define the term ‘partnership’ and discuss
the main features of a partnership
11. discuss the advantages and disadvantages
of a partnership
12. define the term ‘company’
13. identify the different types of companies
and provide examples of each
14. discuss the advantages and disadvantages
of a company.
chapter 1 introduction to accounting 1
 Lo
Explain the 1 The accounting process
process of
accounting and the
differences between
accounting and
bookkeeping.
Accounting The process of
identifying, measuring and
communicating economic
information about an entity
to a variety of users for
decision-making purposes.
Business transactions
Occurrences that affect the
assets, liabilities and equity
items in an entity and must
be recognised (recorded).
Relevant information
Information that makes
a difference in decision
making.
2 introduction to accounting
The word account derives from the Latin words ‘ad’ and ‘computend’, which mean
‘to reckon together’ or ‘to count up or calculate’. Accounting can be defined as the
process of identifying, measuring and communicating economic information about
an entity to a variety of users for decision-making purposes. The first component of
this definition is the process of identifying business transactions. A business trans-
action is an event that affects the financial position of an entity and can be reliably
measured and recorded. Business transactions include such events as withdrawals
of cash by the owner(s), payment of wages and salaries, earning of fees revenue,
purchase of an office photocopier, purchase of stationery, capital contribution by
owners, incurring of interest on a bank loan and payment of quarterly GST (goods
and services tax).
The second component is the measuring of information, which refers to the
analysis, recording and classifying of business transactions. This component ident-
ifies how transactions will affect the entity’s position, and groups together similar
items such as expenses and income. For example, the contribution of capital by the
owners will have the effect of increasing the cash at bank (asset) of the entity and
increasing the capital (equity) of the entity. The earning of fees revenue will have
the effect of increasing the income of the entity and increasing the entity’s assets.
Depending on whether the fees earned were cash fees or on credit, the cash at
bank or debtors of the entity respectively will increase. Throughout the accounting
period, individual assets, expenses, income, equity and liabilities will be grouped
(classified) together to summarise the information. For example, land, buildings,
machinery, equipment and vehicles will be grouped together under the subheading
‘property, plant and equipment’. The final component is the communication of rel-
evant information through accounting reports, such as the income statement and
the balance sheet, for decision-making purposes for the various users. For example,
the total of the property, plant and equipment account will be reported on the bal-
ance sheet. The information reported in the entity’s financial statements should be
relevant and reliable for users of accounting information. Relevant information
is defined as information that makes a difference in decision making. The dif-
ferent users require accounting information for making important decisions such as
whether to invest in a business, whether the entity should continue to manufacture
a product or outsource this process to another entity, and whether the entity has
the resources to pay debts on time. All these decisions involve making the most of
the scarce resource — money. The process of accounting assists users in the allo-
cation of this scarce resource.
The practices of accounting and bookkeeping date back to ancient civilisations
in China, Egypt, Greece and Rome, where families had to keep personal records of
their receipts and payments. The title ‘Father of accounting’ belongs to the Italian
mathematician Fra Luca Pacioli who, in 1494, produced Summa de Arithmetica,
Geometrica, Proportioni et Proportionalita, which included chapters based entirely on
how to record business transactions using a double-entry system. Table 1.1 summar-
ises the process of accounting.
 TABLE 1.1 The process of accounting
Identifying Measuring Communicating Decision making
Transactions that affect This stage includes the Accounting information Accounting information
the entity’s financial analysis, recording and is communicated is used for a range of
position are taken into classifying of business through various decisions by external
consideration. They transactions. reports such as income and internal users.
must be able to be statements, balance
reliably measured and sheets and statements
recorded. of cash flows.

So, now that we have introduced the accounting process, just how does accounting
Bookkeeping The recording differ from bookkeeping, or is it the same thing? Bookkeeping is simply the recording
and summarising of and summarising of financial transactions and the preparation of basic financial
financial transactions and
the preparation of basic statements. Therefore, it may be useful to think of bookkeeping as being part of the
reports. accounting process. Bookkeeping represents the first two stages in table 1.1 compared
with accounting, which represents the four stages of identifying, measuring, commu-
nicating and decision making.

vb
value to • Accounting can be defined as the process of identifying, measuring and communicating
business economic information about an entity for decision making by a variety of users.
• Bookkeeping is the recording and summarising of financial transactions and preparation
of basic financial statements. The bookkeeping process is part of the accounting
process. In some entities, an accountant may perform both bookkeeping and accounting
roles.

Lo
Outline the 2 Accounting information and its role
role of accounting
in decision making by in decision making
various users.
Accounting information is an important part of our everyday decision-making process,
as summarised by this excerpt from the Jenkins Report.

People in every walk of life are affected by business reporting, the cornerstone on which
our process of capital allocation is built. An effective allocation process is critical to a
healthy economy that promotes productivity, encourages innovation, and provides an
efficient and liquid market for buying and selling securities and obtaining and granting
credit (AICPA, ch. 1).

Prospective and current investors, employees, consumers, regulatory bodies,

government authorities and financial institutions are just some of the many indi-
viduals and groups who are interested in accounting information and require
accounting to help them make decisions relating to the allocation of scarce
resources.
Individuals and entities need accounting information to assist in making decisions
about the risks and returns of investment opportunities. Accounting information is
designed to meet the needs of both internal users and external users of accounting

chapter 1 introduction to accounting 3

 information. Accounting information is extremely valuable to an entity’s manage-
Internal users Managers ment (i.e. internal users). It is used to help managers achieve the following:
of the entity who use • Make decisions concerning the operations of the business entity. The information
the information to assist
in various management managers require is usually detailed enough to assist them in management planning
functions. processes such as determining the appropriate sales mix and price of goods, fore-
casting profits, and determining the capacity of assets such as plant.
• Evaluate the success of the business entity in achieving its objectives. This is done
by comparing the performance of the business entity against budgets, and assessing
how well employees have achieved their set targets.
• Weigh up various alternatives when investing the resources of the business entity.
External users (the stakeholders) include such parties as employees,
Accounting provides investors, suppliers, banks, consumers, taxation authorities, regulatory
a range of information bodies and lobby groups, all of whom have their own information needs.
They have a ‘stake’ or interest in the performance of the entity.
that will meet the needs
• Current investors of the entity will seek accounting information to help
of both internal and them evaluate whether the entity’s managers have been appropriate
external users. stewards or custodians of the entity’s assets. They will examine entity
reports to glean how effectively management has invested the assets
External users of the business entity, and whether it has made appropriate business decisions on
(stakeholders) Parties behalf of the investors. This is known as the stewardship function of management.
outside the entity who The information in an entity’s annual report can explain to the investors what areas
use information to make
decisions about the entity. of business the entity has expanded into and what the entity’s strategic plan is for
the next 12 months, 5 years, 10 years.
• Prospective investors will seek information from entity reports to determine whether
or not a particular entity is a sound investment. Information such as the financial
structure of the entity (level of debts versus level of equity), current financial per-
formance and its future growth prospects can help such external users to determine
whether capital growth is expected for the entity.
• Suppliers and banks are interested in gauging the entity’s ability to repay debt, and
the level of risk associated with lending funds to it. Statements such as the state-
ment of cash flows and the balance sheet enable them to evaluate whether the
entity has sufficient funds to meet debt repayments and to cover interest expense.
• Employees are most concerned about the future prospects of the entity. Is there a
likelihood that the entity will expand, consequently creating additional job oppor-
tunities? Is there a possibility of promotion? Or, if the entity is performing poorly,
are jobs at risk? What is the remuneration of the highest paid executives and what
are the financial details of the employee share ownership plan? Particular sections
in the annual report such as the chief executive officer’s (CEO’s) report, directors’
report, statement of comprehensive income and statement of cash flows will pro-
vide useful information to the employees of the entity.
• Government authorities such as the Australian Taxation Office (ATO) will be inter-
ested in the reported profit for the year, and the associated goods and services tax
(GST) paid, in order to calculate the amount of tax payable or to be refunded in a
particular financial year. Regulatory bodies such as the Australian Securities and
Investments Commission (ASIC) will seek to identify whether the business has com-
plied with requirements of the Corporations Act 2001 (Cwlth); for example, whether a
disclosing entity has complied with Australian Accounting Standards.
Table 1.2 summarises the accounting information required by different stakeholders
for their decision making.

4 introduction to accounting
vb
value to • Internal users are the management of the entity, who use the information to assist with
business various management functions.
• External users (also known as stakeholders) are groups outside the entity, who use
accounting information to make decisions about the entity.

TABLE 1.2 Stakeholders and the accounting information they need for their decision making
Stakeholder Accounting information and decision making

Investor Information to determine the future profitability of the entity, to assess

the future cash flows for dividends and the possibility of capital growth of
investment.

Banks Information to determine whether the entity has the ability to repay a loan.

Suppliers Information to determine an entity’s ability to repay debt associated with

purchases.

Employees Information concerning job security, the potential to pay awards and
bonuses, and promotional opportunities.

Consumers Information regarding the continuity of the entity and the ability to provide
the appropriate goods and services.

Government authorities Information to determine the amount of tax that should be paid and any
future taxation liabilities or taxation assets.

Regulatory bodies Information to determine whether the entity is abiding by regulations such
as the Corporations Act and Australian taxation law.

Community Information to determine whether the entity is contributing positively to the

general welfare and economic growth of the local community.

Special interest groups Information to determine whether the entity has considered environmental,
social or industrial aspects during its operations.

Lo
3
Explain the
differences Financial accounting and management accounting
between financial In a typical accounting degree, you will undertake studies in both financial accounting
accounting and
management accounting.
and management accounting. Financial accounting is the preparation and presen-
tation of financial information for all types of users to enable them to make econ-
Financial accounting omic decisions regarding the entity. General purpose financial statements (reports)
Preparation and
presentation of financial
are prepared to meet the information needs common to users who are unable to
information for users to command reports to suit their own needs, while special purpose financial statements
enable them to make (reports) are prepared to suit a specific purpose and do not cater for the generalised
economic decisions
regarding the entity.
needs common to most users. This information is governed by generally accepted
accounting principles (GAAP), which provide accounting standards for preparing
financial statements. Financial accounting is also guided by rules set out in the
Corporations Act and the Listing Rules of the Australian Securities Exchange (ASX).

chapter 1 introduction to accounting 5


Historical cost Original
amount paid or expected to
be received for an item.
Financial statements
A set of statements
directed towards the
common information needs
of a wide range of users.
Statement of cash flows
Statement that reports on
an entity’s cash inflows
and cash outflows for a
specified period.
Income statement
Statement that reports on
the income and expenses of
an entity for a period, and
the resulting profit or loss.
Balance sheet Statement
that reports on the assets,
liabilities and equity of an
entity at a particular point
in time.
Management accounting
Field of accounting
that provides economic
information for use by
management in internal
planning and decision
making.
6 introduction to accounting
Financial accounting is traditionally based on historical figures that stem from the
original transaction; for example, the purchase of office furniture for $100  000 would
be shown in the financial statement (the balance sheet) as an asset for $100  000. Even
though the $100  000 may not reflect the current market value of the office furniture,
the office furniture is still shown at its historical cost, which is the original amount
paid for an asset.
The financial statements consist of the entity’s statement of cash flows, balance
sheet and income statement (for companies, the statement of profit or loss and
other comprehensive income and the statement of changes in equity). The state-
ment of cash flows reports on an entity’s cash inflows and cash outflows, which
are classified into operating, investing and financing activities. The income state-
ment reflects the profit for the entity for a specified time period. (Profit is the
excess of income over expenses for a period.) An entity’s assets, and its liabilities
at a point in time, are reported in the balance sheet (also called the statement of
financial position).
Financial statements will suit a variety of different users, such as the management
of the entity, investors, suppliers, consumers, banks, employees, government bodies
and regulatory authorities.
Management accounting is a field of accounting that provides economic infor-
mation for internal users. The core activities of management accounting include for-
mulating plans and budgets and providing information to be used in the monitoring
and control of different parts of the entity. Management accounting reports are bound
by few rules and are therefore less formal. Because management accounting reports
are prepared for and tailored to suit the needs of management, they can provide any
level of detail. For example, if the human resources manager requires information
on the number of employees who have opted to make additional superannuation
contributions, then a report can be produced. Management accounting reports must
be up to date, and can be prepared at any time for any period. For example, a sales
manager in the entity may demand information on the current day’s sales by the
end of that day.
Ultimately, there will be an interaction between financial accounting and man-
agement accounting, because management accounting will provide economic
information for internal users that is then reflected in the financial accounting
statements for external users. One such example of the interaction between finan-
cial and management accounting is illustrated in the area of segment reporting
by large and diversified companies. Large and diversified companies must dis-
close segment information as part of their accompanying notes to the financial
statements. Reporting on segments assists users in helping to understand an enti-
ty’s relative risks and returns of individual segments of the entity. The operating
segments are reported according to how an entity is organised and managed and
is hence known as the management approach. Therefore, management accounting
determines the operating segments and financial accounting reports these oper-
ating segments to the various users of financial statements. Illustrative example 1.1
shows the reportable operating segments for the Qantas Group. As you can see, the
revenue and result for the Qantas Group have been disaggregated into the oper-
ating segments of Qantas, Jetstar, Qantas Frequent Flyer, Qantas Freight etc. There
are also additional breakdowns for depreciation and amortisation, operating leases,
and so on.
ie illustrative
example 1.1 Reportable operating segments for the Qantas Group
(c) Analysis by operating segment
Qantas
2012 Frequent Qantas Corporate/ Consolidated
$M Qantas Jetstar Flyer Freight Unallocated Eliminations Underlying
Revenue and other income

External segment revenue 10  682 2  915 1  058 1  004 61 4 15  724

Intersegment revenue 1  151 161 99 9 (55) (1  365) —

Total segment revenue and 11  833 3  076 1  157 1  013 6 (1  361) 15  724
other income

Share of net profit/(loss) 6 (19) — 16 — — 3

of associates and jointly
controlled entities

EBITDAR1 1   503 574 234 67 (178) (2) 2  198

Non-cancellable operating (262) (283) — (4) — — (549)

lease rentals
Depreciation and amortisation (1  262) (88) (3) (18) (13) — (1  384)

Underlying EBIT (21) 203 231 45 (191) (2) 265

Underlying net finance costs (170) (170)

Underlying PBT 2 (361) 95

Source: Qantas Airways Ltd 2012, annual report, p. 81.
1 EBITDAR
(Underlying earnings before income tax expense, depreciation, amortisation, non-cancellable operating lease rentals and net finance
costs) includes the impact of the change in accounting estimates for discount rates of $30 million (Qantas $30 million), and Frequent Flyer accounting
(Eliminations $5 million) as described in Note 1(c).
2 The Corporate segment is the only operating segment with Underlying PBT as the primary reporting measure. The primary reporting measure of other

segments is Underlying EBIT.

Qantas is widely regarded

as the world’s leading
long-distance airline
and one of the strongest
brands in Australia.

chapter 1 introduction to accounting 7

 The main differences between financial accounting and management accounting
are summarised in table 1.3.

TABLE 1.3 Differences between financial accounting and management accounting

Financial accounting Management accounting

1. Regulations Bound by GAAP. GAAP are represented
by accounting standards (including those
issued by both the AASB and the IASB),
the Corporations Act, and relevant rules
of the accounting association and other
organisations such as the ASX.
Much less formal and without any
prescribed rules. The reports are
constructed to be of use to the
managers.

2. Timeliness Information is often outdated by the time Management reports can be

the statements are distributed to the both a historical record and a
users. The financial statements present a projection, e.g. a budget.
historical picture of the past operations of
the entity.

3. Level of detail Most financial statements are of a
quantitative nature. The statements
represent the entity as a whole,
consolidating income and expenses from
different segments of the business.
Much more detailed and can
be tailored to suit the needs
of management. Of both a
quantitative and qualitative
nature.

4. Main users Prepared to suit a variety of users including
management, suppliers, consumers,
employees, banks, taxation authorities,
interested groups, investors, and
prospective investors.
Main users are the managers
in the entity, hence the term
management accounting.

This book will look at different topics involving the use of accounting information
in decision making. Some of these topics are orientated more towards financial
accounting and others are orientated towards management accounting.

vb
value to • Financial accounting provides information for external parties to make economic decisions
business regarding the entity and can be used by management for internal decision making.
• Management accounting is the creation of reports for use by management in internal
planning and decision making.
• Differences between financial and management accounting include accounting rules,
timeliness, level of detail and range of users.

8 introduction to accounting
 Lo
Explain the 4 Australian and international accounting standards
current standard-
setting framework and
the role of the professional
accounting associations
in the standard-setting
process.
International Financial
Reporting Standards
(IFRS) Accounting
standards that are
prepared and issued by the
International Accounting
Standards Board (IASB).
Australian Accounting
Standards Board
(AASB) Australian body
responsible for developing
accounting standards for
application to Australian
entities.
Disclosing entity An entity
that issues securities that
are quoted on a stock
market or made available to
the public via a prospectus.
Financial Reporting Council
(FRC) A statutory body
responsible for overseeing
the accounting and auditing
standard-setting process for
both the public and private
sectors in Australia.
Due process Course of
formal proceedings that are
carried out in accordance
with established rules and
principles for protecting
and enforcing different
individual views associated
with standard setting.
Prior to 2005, Australian Accounting Standards (AASBs) were largely developed by the
Australian Accounting Standards Board (AASB). However, since 1 January 2005, Aus-
tralian entities have complied with International Financial Reporting Standards
(IFRS). The adoption of IFRS ensures compliance with internationally agreed principles,
standards and codes of best practice, resulting in the issue of various new standards and
the amendment of many existing Australian standards. For some standards, the changes
have been substantial; in other instances, the changes have been insignificant. The
Australian Accounting Standards Board (AASB) is responsible for the development
and maintenance of high-quality financial reporting standards in Australia, and to con-
tribute to the ongoing development of global accounting standards. The AASB provides
input into current International Accounting Standards Board (IASB) projects by issuing
exposure drafts of amended AASBs that incorporate the relevant clauses and require-
ments of the IFRS. The functions and responsibilities of the AASB include:
• issuing AASBs
• significantly influencing the development of IFRS (such as providing significant
input to the development of standards relating to the global financial crisis)
• promoting globally consistent application and interpretation of accounting standards.
The Corporations Act stipulates that disclosing entities, public companies and large
proprietary companies must apply AASBs in preparing their financial reports. For
other reporting entities (i.e. non-disclosing entities), preparers and auditors of general
purpose financial statements (GPFSs) have a professional obligation to apply the
accounting standards. A disclosing entity is an entity that issues securities that are
quoted on a stock market or made available to the public via a prospectus.
Financial Reporting Council (FRC)
The Financial Reporting Council (FRC) is a statutory body established under
s. 225(1) of the Australian Securities and Investments Commission Act 2001 (Cwlth), orig-
inally the Australian Securities and Investments Commission Act 1989. The FRC is res-
ponsible for overseeing the accounting and auditing standard-setting process for both
the public and private sectors in Australia. The FRC is made up of key stakeholders
from the business community, the professional accounting bodies, and governments
and regulatory agencies (including the AASB). The FRC was also responsible for pro-
moting the Australian adoption of IFRS, and monitors the operation of AASBs to assess
their relevance and effectiveness in achieving their objectives.
Development of accounting standards
The development of an accounting standard is a lengthy and rigorous process that
can span several years. An accounting standard must go through a number of dif-
ferent steps before it can become an official standard to be applied under the Corpor-
ations Act. It is extremely important for any accounting issue to be carefully examined
and debated prior to it being issued as an accounting standard. Although many of the
AASBs stem from IFRS, the AASB provides input to the process. The examination and
debate of an issue with consultative groups, advisory panels and interested parties
is all part of a standard’s due process. The due process of an accounting standard
includes identifying a technical issue through submissions and other materials from
interested parties; developing a project proposal to determine if the project is worth-
while; researching the issue comprehensively; issuing an exposure draft, discussion
chapter 1 introduction to accounting 9
 paper or an invitation to comment; and issuing a draft interpretation. The outcome
of the due process could be an accounting standard, an interpretation or a conceptual
framework document.
The AASB’s standard-setting process is illustrated in figure 1.1.

FIGURE 1.1 AASB current standard-setting process

AASB standard-setting process

Identify technical Identify technical Identify technical

issue issue issue

Add issue to
the agenda

Research and
consider issue

Submission to
Consult with Comments from
international
stakeholders stakeholders
organisation

Issue standard or Implementation

other pronouncement and compliance

International AASB activities Australian

standards organisations
organisations and individuals

Source: Australian Accounting Standards Board 2013, About the AASB, www.aasb.com.au.

Role of professional associations

Many countries have a professional accounting association, and these are tending to
become more global in their operations. In Australia, there are three: CPA Australia,
the Institute of Chartered Accountants in Australia (ICAA) and the Institute of Public
Accountants (IPA). In New Zealand, it is the New Zealand Institute of Chartered
Accountants (NZICA). Other professional associations include the Association of
Chartered Certified Accountants (ACCA) and the Chartered Institute of Management
Accountants (CIMA). CPA Australia, the ICAA and the IPA play an important role in
regulating Australian companies through stringent regulation of their members and
through their input into the standard-setting process. Members of these bodies are
required to ensure that the entities they are involved with comply with accounting stan-
dards when preparing their GPFSs. The professional bodies have certain professional,
ethical and legislative requirements that their members are required to uphold, such as
maintaining independence during an audit, preparing financial statements according to

10 introduction to accounting
 Australian Accounting Standards, and advising companies on disclosure according to the
requirements of the Corporations Act. The professional bodies regulate the actions and
conduct of their members according to their relevant code of conduct.

CPA Australia
CPA Australia provides education, guidance and support to students, accountants and
businesses in Australia. A certified practising accountant (CPA) is a graduate who has
completed an accounting qualification, the CPA program and three years of approved
work experience, and who undertakes continuing professional development each year.
To be admitted to the CPA program, you need to have completed prescribed accounting
units in an undergraduate or postgraduate degree from a CPA accredited provider or
enrol in CPA foundation level subjects. A CPA can work in various areas, including
public accounting and public sector accounting.

The Institute of Chartered Accountants in Australia (ICAA)

The ICAA provides education to its members, and input to debates affecting the
accounting profession and influencing regulators. A chartered accountant (CA) can
be employed in a range of organisations to provide advice on areas such as running a
business, future directions and complying with accounting standards. To become a CA,
you need to have completed an approved university degree, passed the CA program
and completed three years of approved work experience.

The Institute of Public Accountants (IPA)

The Institute of Public Accountants (IPA) is a professional organisation for accountants,
whose members (public accountants (MIPA)) are known for their practical hands-on
skills and a broad understanding of the total business environment. The IPA consults
with business, government and public body committees and works to address issues
affecting the accounting profession. To become an MIPA, formal accounting qualifi-
cations are required (either an advanced diploma in accounting or university degree
in accounting) plus elements of the IPA program and mentored experience.

vb
value to • Australia adopted Australian equivalents to IFRS from 1 January 2005. The adoption of IFRS
business helps ensure compliance with internationally agreed principles, standards and codes of best
practice.
• The AASB remains the Australian accounting standard setter under the law, and will continue
to issue Australian Accounting Standards (AASBs).
• The Financial Reporting Council (FRC) is responsible for overseeing the standard-setting
process in Australia. The AASB is responsible for developing accounting standards for
application to reporting entities under the Corporations Act.
• The procedure for due process involves the following steps: identify a technical issue;
develop a project proposal, research the issue, consult with stakeholders, and prepare an
exposure draft; send the exposure draft for comment to interested parties; issue an exposure
draft for further comment, and finalise the accounting standard, interpretation or conceptual
framework document.
• The professional bodies provide feedback on exposure drafts and forward any comments
to the AASB. They also inform their members of any developments in accounting standards,
through newsletters and by conducting continuing professional education (CPE) sessions.

chapter 1 introduction to accounting 11

 Lo
Evaluate the 5 Conceptual Framework
role of the
Conceptual Framework,
illustrate the qualitative
characteristics of financial
statements and understand
recognition criteria.
General purpose
financial statements
(GPFSs) Financial
statements prepared to
meet the information needs
common to external users.
Special purpose
financial statements
(SPFSs) Financial
statements prepared to suit
a specific purpose.
Fundamental qualitative
characteristics The
necessary qualitative
characteristics of financial
information.
Enhancing qualitative
characteristics The
qualitative characteristics
that enrich both relevant
and faithfully represented
financial information.
12 introduction to accounting
The AASB’s original conceptual framework contained Statements of Accounting
Concepts (SACs) to assist in the preparation and presentation of financial statements.
It also assisted the standard setters in developing future accounting standards and
helped users in interpreting information in the financial statements. With the adop-
tion of IFRS in 2005, it was necessary to adopt the IASB’s Framework for the Prep-
aration and Presentation of Financial Statements (Framework). The IASB and the FASB
are currently undertaking a joint project on the conceptual framework. The purpose
of the joint project is to ‘develop an improved common conceptual framework that
provides a sound foundation for developing future accounting standards’. In 2010, the
IASB issued a revised document titled Conceptual Framework for Financial Reporting
(Conceptual Framework). This document supersedes the Framework and is yet to be
adopted in Australia. However, this book will focus on the new Conceptual Framework.
The Conceptual Framework applies to entities that are required to prepare general
purpose financial statements (GPFSs). (Note that these are called general purpose
financial reports in the Conceptual Framework.) As noted earlier in the chapter, GPFSs
are financial statements intended to meet the information needs common to users who
are unable to command the preparation of statements tailored to suit their information
needs. GPFSs are in contrast to special purpose financial statements (SPFSs),
which are prepared to suit a specific purpose and do not cater for the generalised needs
common to most users. The components of the Conceptual Framework are as follows.
The objective of financial reporting
According to paragraph OB2 of the Conceptual Framework:
The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources to the entity.
Qualitative characteristics of financial reports
The two fundamental qualitative characteristics of financial reports are relevance
and faithful representation. The four enhancing qualitative characteristics are
comparability, verifiability, timeliness and understandability.
Relevance
The characteristic of relevance implies that the information should have predictive
and confirmatory value for users in making and evaluating economic decisions.
Materiality
The relevance of information is affected by its nature and materiality. Information is
material if omitting it or misstating it could influence decision making. A financial
report should include all information which is material to a particular entity.
Faithful representation
The characteristic of faithful representation implies that financial information faith-
fully represents the phenomena it purports to represent. This depiction implies that
the financial information will be complete, neutral and free from error.
Comparability
The characteristic of comparability implies that users of financial statements must be
able to compare aspects of an entity at one time and over time, and between entities
 at one time and over time. Therefore the measurement and display of transactions
and events should be carried out in a consistent manner throughout an entity, or fully
explained if they are measured or displayed differently.

Verifiability
The characteristic of verifiability provides assurance that the information faithfully
represents what it suggests that it is representing.

Timeliness
The characteristic of timeliness means that the accounting information is available to
all stakeholders in time for decision-making purposes.

Understandability
The characteristic of understandability implies that preparers should present infor-
mation in the most understandable manner to users, without sacrificing relevance or
reliability. ‘Financial reports are prepared for users who have a reasonable knowl-
edge of business and economic activities and who review and analyse information
diligently’ (para. QC32).
The consolidated income statement for the Qantas Group illustrates the qualitative
characteristics. It reports revenues less expenses in an easy-to-understand format to
Profit Income less determine the profit for the year (understandability).
expenses for a reporting The profit is relevant for determining the profitability of a company, and can be used
period.
by a number of different stakeholders — investors, consumers, employees and lenders.
The financial statement will show separately material items that are significant in
nature. For example, the amounts in the Qantas Group report (as shown in figure 1.2)
are in millions of dollars, and the totals for expense groups (e.g. manpower and staff
related, fuel) are shown rather than the breakdowns of individual expenses (relevance).
An entity’s income statement reports profit for a prescribed period of time. Its
format will be similar to that of other companies in the same industry, and this feature
allows for comparison and analysis between companies. It also should not change sig-
nificantly from period to period, thereby facilitating analysis within a company
between the years (comparability).
An entity’s income statement, which will have been independently audited (veri-
fiability), is a reliable representation of a company’s income less expenses. In the
audit report contained within the financial statements, the auditor will
state whether the financial statements have been prepared in accord-
An entity’s income ance with accounting principles and standards, and whether they are
statement is a reliable an accurate representation of performance for the period (faithful
representation of a representation).
company’s income Finally, the financial statements of an entity will be made available
less expenses. to users within three months of the end of the financial period. This is
known as timeliness.

Cost constraint on financial information

The benefits of providing financial information, such as improved effectiveness and
efficiency of decision making by users, should outweigh the costs of providing it. Cost
is the major constraint on the provision of financial information. The costs of pro-
viding financial information include those associated with the collecting, processing,
verifying, disseminating and storing of financial information.

chapter 1 introduction to accounting 13

 FIGURE 1.2 Consolidated income statement of the Qantas Group
The Qantas Group
Consolidated income statement
for the financial year ended 30 June 2012
2012 2011
Notes $M $M
Revenue and other income
Net passenger revenue 12  494 12  042
Net freight revenue 784 842
Other 3 2  446 2  010
Revenue and other income 15  724 14  894
Expenditure
Manpower and staff related 3  774 3  695
Fuel 4  220 3  627
Aircraft operating variable 2  980 2  768
Depreciation and amortisation 1  384 1  249
Non-cancellable aircraft operating lease rentals 549 566
Ineffective and non-designated derivatives 25 165 120
Share of net profit of associates and jointly controlled entities 15 (3) (22)
Other 3 2  828 2  455
Expenditure 15  897 14  458
Statutory (loss)/profit before income tax expense and net finance costs (173) 436
Finance income 5 181 192
Finance costs 5 (357) (305)
Net finance costs 5 (176) (113)
Statutory (loss)/profit before income tax expense (349) 323
Income tax benefit/(expense) 6 105 (74)
Statutory (loss)/profit for the year (244) 249

Source: Qantas Airways Ltd 2012, annual report, p. 65.

Definition and recognition of the elements

of financial statements
The Conceptual Framework establishes definitions of the elements of financial
statements — assets, liabilities, equity, income and expenses — and specifies criteria
for their inclusion in financial statements.

Asset A resource controlled
by the entity as a result of
past events and from which
future economic benefits
are expected to flow to
the entity.
Assets
Assets are defined as ‘a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity’ (para. 4.4(a)).
Examples of assets for JB Hi-Fi Ltd include plant and equipment, cash, inventories,
goodwill and intangible assets. For the Qantas Group, they include inventories, prop-
erty, plant and equipment, intangible assets and investments.

14 introduction to accounting

Liability A present
obligation of the entity
arising from past events,
the settlement of which
is expected to result in
an outflow from the entity
of resources embodying
economic benefits.
Equity The residual interest
in the assets of the entity
after all its liabilities have
been deducted.
Income Increases in
economic benefits during
the accounting period
in the form of inflows or
enhancements of assets,
or decreases of liabilities
that result in increases in
equity, other than those
relating to contributions
from equity participants.
Expenses Decreases in
economic benefits during
the accounting period in
the form of outflows or
depletions of assets or
incurrences of liabilities
that result in decreases in
equity, other than those
relating to distributions to
equity participants.
vb
value to
business
Liabilities
Liabilities are defined as ‘a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits’ (para. 4.4(b)). Examples of liabilities for
JB Hi-Fi Ltd include borrowings, trade payables and current tax payable. For the
Qantas Group, they include payables, lease obligations, revenue received in advance
and provisions.
Equity
Equity is defined as the residual interest in the assets of the entity after deducting
its liabilities. Equity is increased through the contributions of owners, and through
the excesses of the entity’s income over its expenses. Equity is decreased by excesses
of expenses over income, and by distributions to owners. Examples of equity for
JB Hi-Fi Ltd include capital contributions, dividends, reserves and retained earnings.
Examples for the Qantas Group consist of issued capital, treasury shares, reserves and
retained earnings.
Income
Income is defined as ‘increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity participants’
(para. 4.25(a)). Examples of income for JB Hi-Fi Ltd include revenue, interest, and
dividend income from investments in other entities. Examples from the Qantas Group
include net passenger revenue and net freight revenue.
Expenses
Expenses are defined as ‘decreases in economic benefits during the accounting period
in the form of outflows or depletions of assets or incurrences of liabilities that result
in decreases in equity, other than those relating to distributions to equity participants’
(para. 4.25(b)). Examples of expenses for JB Hi-Fi Ltd include sales and marketing
expenses, rent expense, finance costs and salaries. Examples for the Qantas Group
include fuel, depreciation and amortisation, aircraft operating variable and manpower
and staff related expenses.
• The Conceptual Framework establishes the objective of financial statements, and identifies
the different users of GPFSs.
• The Conceptual Framework deals with transactions and other events that are not currently
included in the accounting standards.
• The Conceptual Framework identifies the qualitative characteristics — relevance,
(including materiality) faithful representation, comparability, verifiability, timeliness and
understandability — that financial information should possess. It also discusses the cost
constraint on the provision of relevant and faithfully represented information.
• The Conceptual Framework establishes definitions of the elements of the financial statements,
and specifies what is required of each of the elements for inclusion in the financial
statements.
chapter 1 introduction to accounting 15

Conceptual Framework
Document that sets out
the objective of financial
statements, assumptions
underlying financial
statements, and the
qualitative characteristics
of financial statements,
and defines the elements
of financial statements
and the recognition criteria
applied to the elements.
16 introduction to accounting
The definition and recognition of assets
We have been referring to the elements of the balance sheet (assets, liabilities and
equity). Accounting professions and regulators in various countries, including Australia,
New Zealand and the United States, have developed frameworks for the preparation
and presentation of financial statements. Such frameworks address matters such as
the objective of financial statements, the assumptions underlying financial statements
and the qualitative characteristics of financial statements, define the elements of
financial statements (assets, liabilities, equity, income and expenses) and identify the
recognition criteria to be applied to the elements. They also guide the development
of accounting standards. As is the case with the globalisation of accounting standards,
conceptual frameworks are also converging. References throughout this chapter, and
subsequent chapters, are to the IASB’s Conceptual Framework for Financial Reporting
(Conceptual Framework). At the time of writing, the IASB has recommenced work
on the Conceptual Framework project. The project is focusing on the reporting entity,
elements of financial statements (including recognition and derecognition), measure-
ment, presentation and disclosure.
Asset definition
An asset is formally defined in the Conceptual Framework (para. 4.4(a)) as ‘a resource
controlled by the entity as a result of past events and from which future economic ben-
efits are expected to flow to the entity’. The essential characteristics for an asset are:
1. the resource must be controlled by the entity
2. the resource must be as a result of a past event
3. future economic benefits are expected to flow to the entity from the resource.
Control
An entity must control the item for that item to be considered an asset and recognised
on the balance sheet. Legal ownership is synonymous with control; however, legal
ownership is not a necessary prerequisite for control. The concept of control refers
to the capacity of the entity to benefit from the asset in the pursuit of its objectives,
and to deny or regulate the access of others to the benefit. To illustrate this concept,
consider an entity that arranges to lease an asset required for its manufacturing pro-
cess. The lessee (the entity) pays the lessor (the owner of the asset) a monthly rental.
The lease contract specifies that the lease can be cancelled by the lessor with one
month’s notice. In this scenario, the entity is able to use the asset but it does not have
control of the asset, given that the lessor can cancel the contract. It is the lessor who
controls access to the asset. What if the contract was non-cancellable and the lessee
had the right to purchase the asset at the end of the lease contract at a predeter-
mined price? In this situation, it is most likely that the lessee controls the asset even
in the absence of legal ownership. Other examples of assets where control is present
in the absence of legal ownership include licences and management rights.
Past event
Another criterion necessary for an item to be defined as an asset is the existence of a
past event that has resulted in the entity controlling the asset. Most assets are gener-
ated as a result of an exchange transaction, non-reciprocal transfers or discoveries.
Consider an office building that is to be used as a rental property. The first two asset
definition criteria are satisfied, as the building creates future economic benefits in the
 form of rental income, and the entity owns the building. If the building is purchased,
an exchange transaction has occurred and the requirement that there be a past event
is satisfied. If the building is bequeathed to the entity, a non-reciprocal transfer (a past
event) is also deemed to have occurred. If the entity is in the process of finding a suit-
able property and has enlisted the services of a commercial real estate agent to assist
in the task, the past event criterion is not satisfied as no exchange has occurred yet.
The building is not considered an asset until this exchange has occurred.

Future economic benefits

‘Future economic benefits’ refers to service potential. It means that the items must
provide benefits to the entity that uses them in order to be regarded as assets. The
provision of benefits can take the form of having goods and services desired by cus-
tomers available for sale. It can also take the form of being able to satisfy human
wants. For example, an item of plant and equipment that produces goods for sale is
an asset because it provides service potential (that is, it produces goods that can be
sold for cash). An art gallery’s public collection of artwork is an asset, as the collection
provides service potential to the gallery (that is, the collection attracts visitors to the
gallery and enables the gallery to achieve its objective of attracting a certain number
of visitors). The latter example highlights that the future benefits do not necessarily
have to involve cash.

Asset recognition
Recognition Recording The term recognition refers to recording items in the financial statements with a
items in the financial
­monetary value assigned to them. Therefore, ‘asset recognition’ means that the asset is
statements with a monetary
value assigned to them.
Monetary concept Use
of money as the basis
of quantifying items in
financial statements.
recorded and appears on the balance sheet. Central to the recognition principle is that
items can be measured in monetary terms. This is referred to as the monetary concept.
As money is the language used to quantify items recognised in the financial statements, if
items cannot be assigned a monetary value then they cannot appear on the balance sheet.
Satisfying the definition criteria is only part of the process in recording an item on
the balance sheet — the asset recognition criteria must also be satisfied. The asset
recognition criteria in the Conceptual Framework (para. 4.44) requires it to be ‘probable
that the future economic benefits will flow to the entity’, and that the asset ‘has a cost
or value that can be measured reliably’.
The threshold used to assess ‘probable’ is that the future economic benefits are
more likely than less likely. This is an assessment that the preparer of the accounts is
required to make. Finally, the asset must be capable of being measured reliably. If the
asset is acquired as a result of an exchange transaction, the asset possesses a cost and
satisfies this requirement. If the asset is acquired as a result of a non-reciprocal transfer
or discovery, assigning a reliable value is more problematic. ‘Reliably measured’ does
not mean that the asset is measured with certainty. Measurement of elements of finan-
cial statements may involve estimations and assumptions, as previously discussed.
A reasonable basis and justification for estimations and assumptions is important. In
relation to assets, an example of exercising judgement and making estimations involves
the measurement of the value of accounts receivable to report on the balance sheet. An
entity is required to estimate the expected cash that will be received from its customers
who owe money. This involves consideration of amounts unlikely to be collected. We
will consider the issue of asset measurement in more detail.
To illustrate the asset recognition criteria, consider the following example. An entity
has provided services to a customer totalling $95  000. The services were provided to

chapter 1 introduction to accounting 17

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granted to the public domain.
 BLACKWOOD’S

EDINBURGH MAGAZINE.

No. CCCCLXXXIV. FEBRUARY 1856.

Vol. LXXIX.
 CONTENTS.

Modern Light Literature—Poetry, 125

A Military Adventure in the Pyrenees—concluded, 138
The Wondrous Age, 154
Public Lectures—Mr Warren on Labour, 170
Touching Oxford, 179
The Ancient Coins of Greece, 193
Tickler among the Thieves! 200
The Drama, 209
Lessons from the War, 232
Religion in Common Life, 243

EDINBURGH:
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PRINTED BY WILLIAM BLACKWOOD AND SONS, EDINBURGH.

 BLACKWOOD’S

EDINBURGH MAGAZINE.

No. CCCCLXXXIV. FEBRUARY, 1856.

Vol. LXXIX.

MODERN LIGHT LITERATURE—POETRY.

“Poets,” said the ancient wisdom, “are not made, but born.” We
have made miraculous progress in all the arts of manufacture since
the time of this saying, but we have not been able to controvert the
judgment of our forefathers. Education, refinement, taste, and talent,
are great things in their way, and men do wonders with them; but we
have not fallen yet upon a successful method of bringing down the
divine spark into the marble, let us work it ever so curiously. The
celestial gift in these new times, as in the old, comes down with
divine impartiality, yet seldom into the tenement most specially built
and garnished for its reception. We can make critics, connoisseurs,
“an enlightened audience,” but, let us labour at it as we will, we
cannot make a poet.
 And indeed, to tell the truth, it is but small help we can give, with
all our arts and ingenuities, even to the perfecting of the poet born.
Science discusses the subject gravely—at one time troubled with
apprehensions lest her severe shadow should kill the singer outright,
as Reason killed Love—at another, elate with the happier thought of
increasing all his conquests, and sending forth as her own esquire,
bearing her ponderous lance and helmet, the glorious boy in his
perennial youth. It is a vain speculation. The poet glances past this
important figure with a calm eye and a far-shining smile. His
vocation is beyond and beyond the range of all the sciences. The
heart and soul that were in the first home, ere ever even spade and
distaff were invented, when two forlorn hopeful creatures, wistfully
looking back to the sunset of Eden, wistfully looking forward to the
solemn nightfall of the drear world without, with all its starry
promises of another morning and a higher heaven, were all the
human race—are world and scope enough for the humanest and
most divine of arts. That God has made of one blood all the nations
and all the generations of this many-peopled earth, is the argument
on which he speaks; that heart answers unto heart all the world over,
is the secret of his power. The petulant passion of a child, the
heroisms and exultations and agonies of that fantastical sweet youth,
over whose unconscious mockery of our real conflict we graver
people smile and weep, are of more import to the poet than all the
secrets of the earth, and all the wonders of the sky; and he turns—it
is his vocation—from the discovery of a planet, forgetting all about it,
to make the whole world ring with joy over a cottage cradle, or weigh
down the very wings of the winds with wailing over some
uncommemorated grave.
Yes, it is a humiliating confession—but in reality we are quite as
like to injure as to elevate our poet by all our educations. Perhaps the
heavenly glamour in his eyne had best be left entirely unobscured by
any laws save those of nature; but at all events it seems tolerably
sure, that the more we labour at his training, the less satisfactory is
the result of it. A school of poets is the most hopeless affair in
existence; and whether it dwindle into those smallest of small
rhymsters, leaden echoes of the silver chimes of Pope, in whom the
eighteenth century delighted, or to the present makers of dislocated
verses, whose glory it is to break stones upon the road where the
Laureate’s gilded coach flashes by, we wait with equal weariness and
equal impatience for the Coming Man, who knows neither school nor
education—whose business it is to rout the superannuated spinsters,
and make the world ring once more with the involuntary outburst of
song and youth.
But we who are but the unhappy victims of the mania, why do we
blame ourselves? Alas! it is not we, but our poets, foolish fraternity,
who have set about this fatal task of making a school and perfecting
themselves in their art. How do you suppose they are to do it, kindest
reader? In other arts and professions the self-love of the student in
most instances suffers a woeful downfall at his very outset. Tutors
and books, dire conspirators against his innocence, startle the
hapless neophyte out of all his young complacency; professors set
him down calmly as a know-nothing; chums, with storms of laughter,
drive him out of his last stronghold. He has to shut himself out from
his college doors; seal himself up, poor boy, in his home letters, and
so sit down and study other people’s wisdom, till he comes by that far
away and roundabout process to some true estimate of his own.
But the poet, say the poets, needs other training. For him it is
safest that we shut him up with himself. Himself, a separated
creature, garlanded and crowned for the sacrifice, is, in one noble
concentration, all the ethics, the humanity, and the religion with
which he has to do; significances, occult and mysterious, are in every
breath of wind that whispers about his dedicated head; his smallest
actions are note-worthy, his sport is a mystery, his very bread and
cheese symbolical. He is a poet—everywhere, and in all places, it is
the destiny of this unfortunate to reverence himself, to contemplate
himself, to expound and study the growth of a poet’s mind, the
impulses of a poet’s affections; he is not to be permitted to be
unconscious of the sweet stirrings within him of the unspoken song;
he is not to be allowed to believe with that sweetest simplicity of
genius that every other youthful eye beholds “the light that never was
on sea or land,” as well as his own. Unhappy genius! ill-fated poet!
for him alone of all men must the heavens and the earth be blurred
over with a miserable I,—and so he wanders, a woeful Narcissus,
seeing his own image only, and nothing better, in all the lakes and
fountains; and, bound by all the canons of his art, falls at last
desperately either in love or in hate with the persistent double,
which, go where he will, still looks him in the face.
 But we bethink us of the greater poets, sons of the elder time.
There was David, prince of lyric-singers; there was Shakespeare,
greatest maker among men. The lyricist was a king, a statesman, a
warrior, and a prophet; the leisure of his very youth was the leisure
of occupation, when the flocks were feeding safe in the green
pastures, and by the quiet waters; and even then the dreaming poet-
eye had need to be wary, and sometimes flashed into sudden
lightning at sight of the lion which the stripling slew. He sung out of
the tumult and fulness of his heart—out of the labours, wars, and
tempests of his most human and most troubled life: his business in
this world was to live, and not to make poems. Yet what songs he
made! They are Holy Writ, inspired and sacred; yet they are human
songs, the lyrics of a struggling and kingly existence—the overflow of
the grand primal human emotions to which every living heart
resounds. His “heart moved him,” his “soul was stirred within him”—
true poet-heart—true soul of inspiration! and not what other men
might endure, glassed in the mirror of his own profound poetic
spirit, a study of mankind; but of what himself was bearing there and
at that moment, the royal singer made his outcry, suddenly, and “in
his haste,” to God. What cries of distress and agony are these! what
bursts of hope amid the heartbreak! what shouts and triumphs of
great joy! For David did not live to sing, but sang because he strove
and fought, rejoiced and suffered, in the very heart and heat of life.
Let us say a word of King David ere we go further. Never crowned
head had so many critics as this man has had in these two thousand
years; and many a scorner takes occasion by his failings, and
religious lips have often faltered to call him “the man after God’s own
heart;” yet if we would but think of it, how touching is this name! Not
the lofty and philosophic Paul, though his tranced eyes beheld the
very heaven of heavens; not John, although the human love of the
Lord yearned towards that vehement angel-enthusiast, whose very
passion was for God’s honour; but on this sinning, struggling,
repenting David, who fights and falls, and rises only to fall and fight
again—who only never will be content to lie still in his overthrow,
and acknowledge himself vanquished—who bears about with him
every day the traces of some downfall, yet every day is up again,
struggling on as he can, now discouraged, now desperate, now
exultant; who has a sore fighting life of it all his days, with enemies
within and without, his hands full of wars, his soul of ardours, his life
of temptations. Upon this man fell the election of Heaven. And small
must his knowledge be, of himself or of his race, who is not moved to
the very soul to think upon God’s choice of this David, as the man
after His own heart. Heaven send us all as little content with our sins
as had the King of Israel! Amen.
And then there is Shakespeare: never man among men, before or
after him, has made so many memorable people; yet amid all the
crowding faces on his canvass, we cannot point to one as “the
portrait of the painter.” He had leisure to make lives and histories for
all these men and women, but not to leave a single personal token to
us of himself. The chances seem to be, that this multitudinous man,
having so many other things to think of, thought marvellously little
of William Shakespeare; and that all that grave, noble face would
have brightened into mirthfullest laughter had he ever heard, in his
own manful days, of the Swan of Avon. His very magnitude, so to
speak, lessens him in our eyes; we are all inclined to be apologetic
when we find him going home in comfort and good estate, and
ending his days neither tragically nor romantically, but in ease and
honour. He is the greatest of poets, but he is not what you call a
poetical personage. He writes his plays for the Globe, but, once
begun upon them, thinks only of his Hamlet or his Lear, and not a
whit of his audience; nor, in the flush and fulness of his genius, does
a single shadow of himself cross the brilliant stage, where, truth to
speak, there is no need of him. The common conception of a poet, the
lofty, narrow, dreamy soul, made higher and more abstract still by
the glittering crown of light upon his crested forehead, is entirely
extinguished in the broad flood of sunshine wherein stands this
Shakespeare, a common man, sublimed and radiant in a very deluge
and overflow of genial power. Whether it be true or not that these
same marvellous gifts of his would have made as great a statesman
or as great a philosopher as they made a poet, it does not lie in our
way to discover; but to know that the prince of English poets did his
work, which no man has equalled, with as much simplicity and as
little egotism as any labouring peasant of his time—to see him setting
out upon it day by day, rejoicing like a strong man to run a race, but
never once revealing to us those laborious tokens of difficulties
overcome, which of themselves, as Mr Ruskin says, are among the
admirable excellences of Art—to perceive his ease and speed of
progress, and how his occupation constantly is with his story and
never with himself,—what a lesson it is! But alas, and alas! we are
none of us Shakespeares. Far above his motives, we would scorn to
spend our genius on a Globe Theatre, or on any other vulgar manner
of earning daily bread. The poet is a greater thing than his poem; let
us take it solely as an evidence of his progress; and in the mean time,
however he may tantalise the world with his gamut and his exercises,
let all the world look on with patience, with awe, and with
admiration. True, he is not making an Othello or a Hamlet; but never
mind, he is making Himself.
Yet the thought will glide in upon us woefully unawares,—What
the better are we? We are ever so many millions of people, and only a
hundred or two of us at the utmost can be made happy in the
personal acquaintanceship of Mr Tennyson or (we humbly crave the
Laureate’s pardon for the conjunction) Mr Dobell. In this view of the
question, it is not near so important to us that these gentlemen
should perfect the poet, as that they should make the poem. We ask
the Laureate for a battle-song, and he gives us a skilful fantasia upon
the harp; we hush our breath and open our ears, and, listening
devoutly to the “Eureka!” of here and there a sanguine critic, who has
found a poet, wait, longing for the lay that is to follow. Woe is upon
us!—all that we can hear in the universal twitter is, that every man is
trying his notes. We are patient, but we are not a stoic; and in the
wrath of our disappointment are we not tempted a hundred times to
plunge these melodious pipes into the abyss of our waste-paper
basket, and call aloud for Punch, and the Times?
Yes, that great poetic rebel, Wordsworth, has heavier sins upon his
head than Betty Foy and Alice Fell; it is to him we owe it, that the
poet in these days is to be regarded as a delicate monster, a creature
who lives not life but poetry, a being withdrawn out of the common
existence, and seeing its events only in the magic mirror of his own
consciousness, as the Lady of Shallott saw the boats upon the river,
and the city towers burning in the sun. The Poet of the Lakes had no
imaginary crimes to tell the world of, nor does it seem that he
regarded insanity as one of the highest and most poetic states of
man; but we venture to believe there never would have been a
Balder, and Maud should have had no crazy lover, had there been no
Recluse, solemnly living a long life for Self and Poetry in the retired
and sacred seclusion of Rydal Mount.
 It is in this way that the manner which is natural and a necessity to
some one great spirit, becomes an intolerable bondage and
oppression to a crowd of smaller ones. The solemn egotism, self-
reserved and abstract, which belonged to Wordsworth, is more easily
copied than the broad, bright, manful nature of our greatest English
poet, who was too mighty to be peculiar; and the delusion has still a
deeper root. It is in our nature, as it seems, to scorn what is familiar
and common to all the world; priesthoods, find them where you will,
are bound to profess a more ethereal organisation, and seek a
separated atmosphere. Wordsworth is a very good leader; but for a
thorough out-and-out practical man, admitting no compromise with
his theory, commend us to Anthony the Eremite, the first of all
monkish deserters from this poor sinking vessel, the world. The poet
is the priest of Nature; out with him from this Noah’s ark of clean
and unclean,—this field of wheat and tares, growing together till the
harvest,—this ignoble region of common life. Let the interpreter
betake him to his monastery, his cloister, his anchorite’s cell—and
when he is there? Yes, when he is there—he will sing to us poor
thralls whom he has left behind, but not of our ignoble passions and
rejoicings, or the sorrows that rend our hearts. Very different from
our heavy-handed troubles, rough troopers in God’s army of
afflictions, are the spectre shapes of this poetic world. True, their
happiness is rapture, their misery of the wildest, their remorse the
most refined; but the daylight shines through and through these
ghostly people, and leaves nothing of them but bits of cloud. Alas, the
preaching is vain and without profit! What can the poet do—when he
is tired of his Mystic, sick of his Balder, weary of Assyrian bulls and
lords with rabbit-mouths? Indeed, there seems little better left for
him than what his predecessors did before. The monk spent his soul
upon some bright-leaved missal, and left the record of his life in the
illumination of an initial letter, or the border of foliage on a vellum
page; the poet throws away his in some elaborate chime of words,
some new inverted measure, or trick of jingling syllables. Which is
the quaintest? for it is easy to say which is the saddest waste of the
good gifts of God.
Also it is but an indifferent sign of us, being, as we undoubtedly
are, so far as poetry is concerned, a secondary age, that there can be
no dispute about the first poet of our day. There is no elder
brotherhood to compete for the laurel; no trio like Wordsworth,
Coleridge, and Southey; no guerilla like Byron to seize upon the
contested honour, nor Irish minstrel to strike a sugared note of
emulation. Should a chance arrow at this moment strike down our
poetic champion, so far from comforting ourselves, like King Henry,
that we have “five hundred as good as he,” we could not find for our
consolation one substitute for Tennyson. Echoes of him we could
indeed find by the score; but no one his entire equal in all the field.
Let no one say we do not appreciate poetry; in these mechanical days
there are still a goodly number of singers who could echo that
unfortunate admission which cost Haverillo his life, and was the last
stroke of exasperation to the redoubtable Firmilian, “I have a third
edition in the press.” But in spite of Smith and Dobell, the Brownings
and the Mystics, our Laureate holds his place; holding his laurel with
justice and right less disputable than most of his predecessors. Yet
our admiration of Tennyson is perplexed and unsatisfactory. He is
the first in his generation, but out of his generation he does not bear
comparison with any person of note and fame equal to his own. He is
small in the presence of Wordsworth, a very inferior magician indeed
by the side of Coleridge; his very music—pardon us, all poets and all
critics!—does not flow. It may be melodious, but it is not winged; one
stanza will not float into another. It is a rosary of golden beads, some
of them gemmed and radiant, fit to be set in a king’s crown; but you
must tell them one by one, and take leisure for your comment while
they drop from your fingers. They are beautiful, but they leave you
perfectly cool and self-possessed in the midst of your admiration. To
linger over them is a necessity; it becomes them to be read with
criticism; you go over the costly beadroll and choose your single
favourites here and there, as you might do in a gallery of sculpture.
And thus the poet chooses to make you master of his song,—it does
not seize upon you.
This is a kind and manner of influence which poets have not often
aimed at. Hitherto it has been the object of this fraternity to arrest
and overpower their audience as the Ancient Mariner fascinated the
wedding guest; and we all know how helplessly, and with what
complete submission, we have followed in the train of these
enchanters, wheresoever it pleased them to turn their wayward
footsteps. But Mr Tennyson aims at a more refined and subtle
influence than this downright enslaving. A poet who writes, or seems
to write, because he cannot help it,—and a poet who writes, or seems
to write, of set purpose and malice prepense, are two very different
persons. A man of the first class could not have written In
Memoriam. Had he been mourning, he must have mourned a closer
grief, and broken his heart over it, ere he had wept the half of those
melodious tears; but for the poet quietly selecting a subject for his
poem, the wisest philosopher could not have suggested a better
choice. A great deal has been said and written on this subject, and we
are fully aware that grief does not make books, or even poems, except
in very rare and brief instances, and that the voice of a great sorrow
is a sharp and bitter outcry, and not a long and eloquent monologue.
But Mr Tennyson does not present himself to us under the strong
and violent compulsion of a great sorrow. It is not grief at his heart
which makes him speak, using his gifts to give ease and utterance to
its burden of weeping; but it is himself who uses his grief, fully
perceiving its capabilities, and the entrance it will give him into the
sacred and universal sympathy of his fellows. For, like all great works
of art, this poem appeals to one of the primitive and universal
emotions of human nature. The dead—the early dead, the beloved,
the gifted, the young: we may discuss the appropriateness of the
tribute, but we cannot refuse to be moved by its occasion. No man
can look on these pages without finding here and there a verse which
strikes home; for few of us are happy enough to live so much as
twenty years in this weary world of ours without some In Memoriam
of our own.
Yet we cannot complain of Mr Tennyson that he makes
merchandise of any of the nearest and closest bereavements, the
afflictions which shake the very balance of the world to those who
suffer them. His sorrow is as much of the mind as of the heart; he
weeps a companion beloved, yet almost more honoured and
esteemed than beloved—a friend, not even a brother, still less a child
or a wife;—enough of the primitive passion to claim sympathy from
all of us, but not so much that our sympathy loses itself in a woe
beyond consolation. Pure friendship is seldom so impassioned; but
had it been a commoner tie—a relationship more usual—these
gradual revelations of grief in all its successive phases must have
been too much at once for the poet and his audience. This nice
discrimination secures for us that we are able to read and follow him
into all those solemn regions of thought and fancy which open at the
touch of death; he does not fall down upon the grave, the threshold,
as we are but too like to do, and we wander after him wistfully,
beguiled with the echo of this thoughtful weeping, which must have
overpowered us had it been as close or as personal as our own. We
feel that over our own minds these same thoughts have flashed now
and then—a momentary gleam—while we were wading in the bitter
waters, and woefully making up our minds, a hundred times in an
hour, to the will of God; but who could follow them out? The poet,
more composed, does what we could not do; he makes those flashes
of hope or of agony into pictures visible and true. Those glimpses of
the face of the dead, of the moonlight marking out upon the marble
the letters of his name, those visions of his progress now from height
to height in the pure heavens, all the inconsistent lights and shadows
—mingled thoughts of the silence in the grave, and of the sound and
sunshine of heaven—not one of them is passed over. People say it is
not one poem, but a succession of poems. It must have been so, or it
would not have been true. One after another they come gleaming
through the long reverie of grief—one after another, noting well their
inconsistencies, their leaps from day to night, from earth to heaven,
the poet has set them down. He knows that we think of the lost, in
the same instant, as slumbering under the sod and as awaking above
the sky; he knows that we realise them here and there, as living and
yet as dead; he knows that our
“fancy fuses old and new,
And flashes into false and true,
And mingles all without a plan.”

It is the excellence of In Memoriam that it is a succession of poems

—that the thread of connection runs loosely—now and then drops,
and as unexpectedly comes to light again—that the sequence of these
fancies knows no logic, and that they come in the strain as they come
to the heart.
At the same time it is equally true that all this is done of set
purpose and intention—that the act with which, glimpse by glimpse,
the whole tearful chronicle is made visible, is a calm deliberate act,
and not a voice out of the present passion of a heartbreaking grief.
The poet has chosen the theme—it is not the theme which urges with
an overpowering impulse the utterance of the poet.
 And so it is with all Mr Tennyson’s verses, for—no disparagement
to his poetic power—verses we must call them. It is true he is now
and then moved by some sudden exclamation, and shouts it out with
an unexpected force which startles his readers, for the moment, into
a more eager sympathy—but for the most part this poet holds his
verse in perfect subordination, and is never overcome or led away by
it. His poetry is made, it is not born. When he can round a sentence
into a stanza, the effect, of its kind, is perfect; but the very form of his
favourite measure, the rhythm of In Memoriam, is against any real
outburst of involuntary song; for the verse which falls so sweetly
when it contains all that belongs to it within its perfect crystal round,
like a dewdrop, makes only a most blurred and unshapely strain
when it has to eke out its sense with another and another stanza.
When the necessities of his subject force him to this, the poet labours
like a man threading together a succession of fish-ponds in hopes of
making a river. Of themselves these silvery globes are perfect, but
there is no current in them, and, work as you will, they can never
flow and glow into a living stream. Yes, our Laureate unhappily is
always far too much “master of his subject;” would that his subject
now and then could but master him!
If it should happen, by any chance, that Mr Tennyson shared in
Wordsworth’s solemn conceit, and designed to make a Gothic
cathedral out of his works and life, we marvel much what place in it
could be given to The Princess, that prettiest of poetic extravagances.
Not a Lady-chapel, though it is of a college of ladies that the story
treats—not a delicate shrine, all wrought in lilies and graces of
foliage, like the shrine of some sweet maiden-saint. No; the Marys,
the Catherines, and the Margarets, symbolised an entirely different
fashion of womankind; yet have we the greatest kindness for Ida in
her girlish heroics, sincerest of all fictions—in her grand words, and
her pride, her inconstant subjects, and her own self-betraying heart.
For our own part, we are so entirely weary of symbols, that we do not
pause to inquire whether The Princess means anything more than it
professes to mean. To us it is only a pleasant picture of the
phantasies of youth.
The sweet and daring folly of girlish heroics and extravagance has
not done half so much service to the poet and story-teller as has the
corresponding stage in the development of man. Yet there is more
innocence in it, and perhaps in its full bloom its pretensions are even
more sublime. The delicate temerity which dares everything, yet at
its very climax starts away in a little sudden access of fear—the
glorious young stoic, who could endure a martyrdom, yet has very
hard ado to keep from crying when you lose her favourite book or
break her favourite flower—the wild enthusiast dreamer, scorning all
authorities, who yet could not sleep o’ nights if she had transgressed
by ever so little the sweet obedience of home,—there is a charm
about this folly almost more delightful than the magic of the bolder
youth, with all its bright vagaries; and it is this which makes our
tenderness for the Princess Ida and all her “girl graduates in their
golden hair.”
Strange enough, however, this phase of youthfulness does not
seem to have struck any woman-poet. We have heroines pensive and
heroines sublime, heroines serious and heroines merry, but very few
specimens of that high fantastical which embraces all these, and into
which most men, and doubtless most women, on their way to soberer
life, have the luck to fall. Mrs Browning is too sad, too serious, too
conscious of the special pangs and calamities which press heaviest on
her sisterhood, to take note of any happier peculiarity. Nor is this
special eye to feminine troubles confined to Mrs Browning: a
weeping and a melancholy band are the poetesses of all generations.
“Woman is the lesser man,” says the Laureate; but only woman is the
sadder man—the victim set apart on a platform of injury—the
wronged and slighted being whose lot it is to waste her sweetness on
hearts unkind and ungrateful, say all the ladies. “Her lot is on you.”
The mature woman has no better thought, when she looks over the
bright girl-heads, bent in their morning prayer; and wherever we
have a female singer, there stands woman, deject and pensive,
betrayed, forsaken, unbeloved, weeping immeasurable tears. Is a
woman, then, the only creature in God’s universe whom He leaves
without compensation? Out upon the thought! but there ought to be
some Ida bold enough to proclaim the woman’s special happinesses
—the exuberant girl-delights—the maiden meditation, fancy free—
the glory of motherhood—the blessings as entirely her own as are the
griefs. Bertha in the Lane is a most moving story, sweetly told; but ye
are not always weeping, O gentlest sisterhood! and where are your
songs of joy?
 If Mr Tennyson intends the hysterical folly of Maud for a
companion picture to this one, he is indeed elevating the woman to a
higher pedestal than even Ida dreamed of; for the youth is a
miserable conception in comparison with this sunbright girl. In the
beginning of the last reign of poets—when men, disturbed by the
great rustle of the coming wings, endeavoured to find out wherein
the magic consisted, to which they could not choose but yield—we
remember to have seen many clever speculations on the nature of
poetry “One said it was the moon—another said nay”; and it was very
hard to understand the unreasonable potency of this enchantment—
which, indeed, clever people, unwilling to yield to an influence which
they cannot measure, are perpetually accounting for by rules and
principles of art. “It has always been our opinion,” says Lord Jeffrey,
“that the very essence of poetry, apart from the pathos, the wit, or the
brilliant description which may be embodied in it, but may exist
equally in prose, consists in the fine perception and vivid expression
of that subtle and mysterious analogy which exists between the
physical and the moral world—which makes outward things and
qualities the natural types and emblems of inward gifts and
emotions, and leads us to ascribe life and sentiment to everything
that interests us in the aspects of external nature.” Lord Jeffrey is a
good authority, though sometimes this troublesome poetry put even
the accomplished critic out of his reckoning; but we are sadly afraid
that this deliverance of his, or at least the idea it contains, has had
some share in the present insanity of all our poets in regard to
Nature. Mr Tennyson may have a private reason of his own for
making such a miserable grumbler as his last hero. Mr Dobell may
hold himself justified, in the heights of self-complacence, and for the
benefit of art, for his atrocious Balder, a criminal, by all poetic laws,
for prosiness interminable, worse than murder; but we would crave
to know what right these gentlemen may have to seize upon our
genial nature, and craze her healthful looks and voices to their
hysterical and ghastly fancy? We are content, if he uses his own
materials, that the Laureate should dabble his hollow with blood to
his heart’s content; but we will not consent, for a hundred laureates,
to make the free heather of our hills, the kindly blossom sacred to
home and to liberty, an image of disgust and horror. After all, this is
a very poor trick and a contemptible—at its best much like that which
Mr Ruskin denounces as the most ignoble thing in painting, the