(eBook PDF) Accounting: Basic Reports 10th

Edition pdf download

https://ebooksecure.com/product/ebook-pdf-accounting-basic-
reports-10th-edition/

Download more ebook from https://ebooksecure.com

We believe these products will be a great fit for you. Click
the link to download now, or visit ebooksecure.com
to discover even more!

(eBook PDF) Basic Financial Accounting 4e

http://ebooksecure.com/product/ebook-pdf-basic-financial-
accounting-4e/

(eBook PDF) Basic College Mathematics 10th Edition

http://ebooksecure.com/product/ebook-pdf-basic-college-
mathematics-10th-edition/

(eBook PDF) Basic Accounting for Non-accountants 2

http://ebooksecure.com/product/ebook-pdf-basic-accounting-for-
non-accountants-2/

Progress in Heterocyclic Chemistry Volume 29 1st

Edition - eBook PDF

https://ebooksecure.com/download/progress-in-heterocyclic-
chemistry-ebook-pdf/
(eBook PDF) Accounting 10th Edition Australia

http://ebooksecure.com/product/ebook-pdf-accounting-10th-edition-
australia/

(eBook PDF) Contemporary Accounting 10th Edition

http://ebooksecure.com/product/ebook-pdf-contemporary-
accounting-10th-edition/

(eBook PDF) Introduction to Programming Using Visual

Basic 10th Edition

http://ebooksecure.com/product/ebook-pdf-introduction-to-
programming-using-visual-basic-10th-edition/

(eBook PDF) Translational Medicine in CNS Drug

Development, Volume 29

http://ebooksecure.com/product/ebook-pdf-translational-medicine-
in-cns-drug-development-volume-29/

(eBook PDF) Financial Accounting 10th Australian

Edition

http://ebooksecure.com/product/ebook-pdf-financial-
accounting-10th-australian-edition/
ACCOUNTING
BASIC REPORTS
 PREFACE
Accounting: Basic Reports is a companion text to Accounting: To Trial Balance. It is designed
specifically for students studying Prepare Financial Reports as part of the Financial Services
Training Package. The text is also suitable for other accounting courses in basic undergradu-
ate accounting, in TAFE colleges and in the secondary school area.
In order to satisfy the requirements of the Financial Services Training Package, this text
follows closely the structure of the unit of competency. Its main emphasis is on building
skills associated with recording balance day adjustments and closing entries, and on prepara-
tion of financial reports for single-owner business entities that are not reporting entities. It
provides comprehensive material covering Generally Accepted Accounting Principles and
Accounting Standards, as well as accounting entries for balance day adjustments, reversals
and closing entries, and preparation of final reports for various sole trader businesses (ser-
vice and retail). To meet the requirements of the unit of competency, a chapter covering
accounting for depreciable assets has also been included in the book. All material has been
written in strict accordance with current accounting standards.
All units contain full topic introductions, illustrative examples, extensive graded ques-
tions in a learning sequence and solutions to some key questions. A solutions manual con-
taining those solutions not currently provided in the text is also available directly from
Cengage Learning Australia. Note further that some questions have been adapted to accom-
modate the application of MYOB Accountright software.

GST
The treatment of GST as it relates to balance day adjustments and final reports is in line
with current accounting practice and meets legislative requirements.

Accounting standards
This edition has been updated to reflect the recent introduction of Australian equivalents of
International Financial Reporting Standards (IFRS).

viii
ABOUT THE AUTHORS
Dr Nicholas A Mroczkowski
PhD (Finance) Monash, MAcc (Finance) RMIT, BBus (Accounting) Swinburne, DipBus (Financial
Accounting) Ballarat, BEd Hawthorn Inst Ed, FCPA, Chartered Accountant.
Nick is a Senior Academic in the Faculty of Business at the Australian Catholic University,
Melbourne (ACU). He has more than 30 years of professional experience in Australia and
abroad, encompassing a variety of technical disciplines including auditing, financial account-
ing, finance and education. Prior to joining ACU, Nick was a Senior Lecturer in Finance and
Accounting at Swinburne University of Technology, Lecturer in Accounting and Finance at
Monash University, and a Senior Lecturer in Accounting at Deakin Business School. Nick has
also held senior positions in professional practice, including the position of Technical Director
(Audit and Accounting) for a major chartered accounting firm for a period of 15 years. His
client base includes banks, non-financial institutions, governments, educational bodies and a
range of medium-to-large companies in the private sector.

David Flanders
CPA, BCom, BEd
David Flanders has been an accounting teacher at Kangan Institute for more than 20 years.
His main teaching areas are computing accounting, financial accounting, budgeting and corpo-
rate governance. He has co-authored several textbooks across different accounting areas for
more than 10 years and has been extensively involved in writing materials for students via
distance learning.

ACKNOWLEDGEMENTS
The publisher and the authors would like to thank Daryl Fleay and Neville Poustie for their
contribution to the previous edition.
Their work has provided a tremendous platform for future editions to follow. They have
also assisted in reviewing and providing valuable feedback to the current edition.
We would also like to thank Silvana Disisto for completing a technical edit of the
textbook.

ix
x
Resources guide

xi
 COMPETENCY GRID
This text covers the following competencies from the FNS10 Financial Services Training Package:
• BSBFIA401: Prepare financial reports.
The following grid maps the elements of the above unit to the relevant chapters of this text.
BSBFIA401: Prepare financial reports
Element Chapter
1. Maintain asset register 2, 5
2. Record General Journal entries for balance day adjustments 2, 3, 4, 5
3. Prepare final ledger accounts 2, 3, 4
4. Prepare end of period financial reports 2, 4

Visit http://www.cengagebrain.com and search for this book to access the

bonus study tools on the companion website for Accounting Basic Reports 10e.

xii
1
INTRODUCTION TO
ACCOUNTING: REGULATIONS,
REPORTS AND SYSTEMS

Learning objectives
Upon completion of this chapter you should be able to:
• briefly describe the accounting Conceptual Framework
• briefly explain the term ‘GAAP’
• briefly explain the role of the Statements of Accounting Concepts
• briefly explain the role of Australian accounting standards
• define and explain the purpose and role of the following statements:
– statement of financial position for a sole trader business for both external accounting and
internal management purposes
– statement of comprehensive income for a sole trader business for both external accounting
and internal management purposes
• explain the basic factors that influence the design of an accounting system and the role of a
chart of accounts as part of the management information system for a sole trader business.

1
 Accounting Basic Reports

The need for financial reporting

The preparation of financial reports is often considered to be the most important part of the accounting pro-
cess, since the information gleaned from them can be used by several different parties for making informed
decisions regarding the business entity. These parties include management, shareholders, suppliers, custo-
mers, finance providers, regulatory authorities, employees and the general public. A financial report can be
any report that highlights financial data, such as a statement that shows total money received and paid by
the entity (receipts and payments report), or that shows the total sales for a particular period by the entity
(a sales report for example). Typically, however, the term ‘financial report’ relates to specific types of finan-
cial statements required to be prepared by the entity, and usually for the benefit of parties external to the
entity; for example, investors, suppliers of credit, lending institutions and other interested parties such as
those described above.
An authoritative definition of the term ‘financial report’ is provided in the Corporations Act 2001 (Cth)
(discussed below), which states that a financial report must consist of the financial statements for the year
and the notes accompanying the financial statements. Financial statements are defined as those required by
accounting standards, and include the statement of financial position, the statement of comprehensive
income, the statement of changes in equity and the statement of cash flows. Notes accompanying the
financial statements include specific disclosures required by various regulations (such as the Corporations
Act) and accounting standards; they may include any additional information and notes required to further
explain particular items disclosed in the financial statements. In more conventional terms, this means that
entities that are required to prepare a financial report must, as a minimum, actually prepare four reports
and provide additional information explaining the various items disclosed in those reports. Furthermore,
to avoid duplication of terminology, the four individual reports that make up the financial report are more
commonly referred to as statements rather than reports and include the following:
• a statement that shows the assets, liabilities and equity of the business, commonly known as the balance
sheet, but now more formally known as the statement of financial position
• a statement that shows the income and expenses of the business and the resulting profit or loss for the
period, commonly known as the profit and loss statement, but now more formally known as the statement
of comprehensive income
• a statement that shows all movements in equity (put simply, the amounts owing to the owners of the
business), formally known as a statement of changes in equity, and
• a statement that shows the flows of cash (by category) in and out of the business, formally known as
the statement of cash flows.
From a user’s perspective, all four statements can provide useful information regarding various aspects of
the business entity’s activities. For instance, the statement of comprehensive income can reveal whether
the firm is profitable and this information could prove invaluable to various parties that may wish to assess
whether the level of profit (and return on their investment) is sufficient in relation to comparable firms
and investments. The statement of financial position will provide useful information relating to the

2
 Chapter 1 Introduction to accounting: Regulations, reports and systems

financial stability of the business entity – in particular, whether or not the entity has the potential to sur-
vive in the short term and in the long term. The statement of changes in equity will show the changes that
have affected the owner’s claims on the business entity during the year. Finally, the statement of cash flows
will provide valuable information allowing users to assess the quality of the earnings generated during the
period and also to determine what financing and investing decisions have been made by management dur-
ing the period. The focus of this text will be the preparation of two of the primary statements described
above: the statement of financial position and the statement of comprehensive income.
While it may appear to be a simple process, the preparation of financial reports, particularly reports
prepared for the benefit of external parties, can often be a very complex task even for the most qualified
and experienced accounting practitioner. This stems mainly from the many rules and regulations relating
to financial reporting and the size and nature of the business entity itself. Indeed, many countries have
extensive and complex financial reporting regulations and Australia is no exception in this regard. Often
the arguments for greater regulation in financial reporting arise from the need for greater transparency
and disclosure of vital information, particularly for entities in which the general public may have consid-
erable exposure. For example, large public companies listed on the Australian Securities Exchange will
have a considerable number of shareholders (hundreds and sometimes thousands) whose interests need
to be monitored and protected by financial reporting regulations and by other means. While many of
these rules and regulations are outside the scope of this text, it is important for students of accounting
to have a general understanding of the financial reporting framework within a specific country, albeit at
a basic level. In this regard, the following paragraphs briefly examine the general financial reporting envi-
ronment in Australia.

GAAP
‘GAAP’ is the acronym for Generally Accepted Accounting Principles and traditionally it was taken to mean all
of the basic principles and conventions of accounting. For instance the principle of historical cost, the
concept of the accounting period, the doctrine of conservatism, the entity convention, the principle of
accrual accounting and all of the other elementary principles underlying the fundamentals of accounting
were collectively known as GAAP. More recently, however, the term has been given a wider meaning, both
internationally and within Australia. What GAAP now stands for is the entire financial reporting framework
specific to a particular country including, in the case of Australia, relevant Acts of Parliament, accounting
standards and pronouncements, securities exchange listing rules, internal rules of the accounting professional
bodies (for instance, CPA Australia, the Institute of Chartered Accountants in Australia, and the Institute of
Public Accountants), statements and guidance releases issued by regulators, and various concepts statements
and interpretations issued by those bodies that set accounting standards, such as the Australian Accounting
Standards Board. Some of the components of Australian GAAP, also commonly abbreviated as A-GAAP, are
considered overleaf.

3
 Accounting Basic Reports

Corporations legislation
Generally, in Australia the Corporations Act 2001 is at the top of the financial reporting hierarchy for com-
panies and other specific entities required to comply with the reporting provisions of the Act (such as listed
trusts). Therefore, when determining what the financial reporting requirements are for an individual busi-
ness entity, the first step is usually to identify the structure and/or legal form of the entity itself. If, for
instance, the entity is a company, then the Corporations Act will apply, since the legislation is intended to
regulate the affairs of all companies and provide detailed rules and regulations ranging from basic registra-
tion procedures and day-to-day management to complex periodic financial reporting requirements. The
Corporations Act is a Federal Act of Parliament that applies to companies and other entities required to
report under the Act; for example, all entities listed on the Australian Securities Exchange (whether they
are companies or not). Entities that are not companies typically include listed trusts and other investment
schemes that raise funds from the general public by issuing a prospectus. Companies often also issue a
prospectus (an offer document) to raise funds from public investors. In simple terms, a prospectus is a
legal document inviting the public to invest in shares, units or interests in profit-making schemes.
The financial reporting requirements for companies (other than small private companies that are specifi-
cally defined in the Corporations Act 2001) are extensive and will usually require the application of all of the
GAAP rules, including compliance with the full reporting provisions of the Corporations Act. For this rea-
son, the comprehensive financial statements of large companies are often referred to as statutory accounts
(that is, the external financial statements that are required by the law). In contrast, detailed financial state-
ments required for internal and specific purposes are often referred to as management accounts. These inter-
nal financial statements are rarely (if ever) made available to the general public. Companies and other
entities required to prepare financial reports must also have their financial statements audited. Stated
simply, an audit is an examination of the financial affairs of the entity by an independent auditor who will
provide an opinion on whether the financial statements are presented fairly (that is, whether they present a
true and fair view of the financial affairs of the entity).
It is noted that, while the financial reporting requirements of companies and other similar entities are impor-
tant for an understanding of GAAP, the focus of this text is on the preparation of financial reports for sole
traders. The general financial reporting requirements for sole traders are explained at the end of this chapter.

Accounting standards,
pronouncements and concepts
The Corporations Act 2001 also requires companies and other entities that are required to prepare a financial
report to comply with relevant accounting standards and other pronouncements issued by the Australian
Accounting Standards Board (AASB). The AASB, which was first established by the Commonwealth govern-
ment in 1989, has the responsibility for developing accounting standards and making other important

4
 Chapter 1 Introduction to accounting: Regulations, reports and systems

pronouncements relating to financial reporting for companies and other entities in the private sector.
Accounting standards can be described simply as authoritative rules of accounting, which can include spe-
cific methods of accounting practice such as the manner in which particular types of transactions and
other events should be reflected in the financial statements. For example, there are specific accounting stan-
dards that prescribe accounting methods and procedures for such items as inventory (stock), depreciation,
property, plant and equipment and the like, and some of these standards also require certain information
to be disclosed in the financial statements. In the case of property, plant and equipment for instance, the
method of valuation of such assets is required to be disclosed in the notes accompanying the financial
statements. Note that the application of AASB standards is a legal requirement for all companies and
other entities that are required by the Corporations Act to prepare financial reports. Non-compliance with
AASB standards in preparing and presenting financial statements may result in serious consequences for
the entities concerned.

The Conceptual Framework

The AASB is also responsible for developing the Conceptual Framework, which is simply a set of basic con-
cepts and principles that provide the foundations for financial reporting. These include concepts that:
• identify the types of business entities that need to prepare financial reports
• explain the objectives of financial reporting and identify relevant parties interested in financial reports
• outline the basic qualities of financial information
• define the fundamental elements of financial reporting (that is, assets, liabilities, equity, income and
expenses).
On a basic level, concepts can be regarded as the building blocks of financial reporting, which have been pro-
gressively developed over time into an overall framework for the preparation and presentation of financial
reports. The existing conceptual framework in Australia has taken more than 30 years to advance to its cur-
rent state and continues to evolve in line with ongoing changes to economic, commercial, technological and
legal environments both in Australia and abroad. Among these developments, standards and pronounce-
ments issued by international accounting standards setting bodies such as the International Accounting
Standards Board (IASB) have played a significant role in shaping the conceptual framework and accounting
standards in Australia.
One of the first concept statements in the Conceptual Framework is primarily concerned with identify-
ing reporting entities. These are business entities with particular characteristics, which are required to prepare
comprehensive financial reports: for example, large public companies listed on the Australian Securities
Exchange. Comprehensive financial reports, which are also (and more accurately) referred to as General
Purpose Financial Reports (GPFRs), are detailed financial reports that comply with all of the requirements of
GAAP. The reporting entity concept has been developed and issued in the form of a statement titled State-
ment of Accounting Concepts SAC 1 Definition of the Reporting Entity. Similarly SAC 2, (although now
repealed and thus withdrawn) dealt with the objectives of financial reporting, and was issued as an

5
 Accounting Basic Reports

authoritative statement; its full title was Statement of Accounting Concepts SAC 2 Objective of General
Purpose Financial Reporting.
It is worth noting the genesis of the Conceptual Framework in Australia. Prior to 1 January 2005, the
AASB’s Conceptual Framework consisted of four statements of accounting concepts: not only SAC 1 Definition
of the Reporting Entity and SAC 2 Objective of General Purpose Financial Reporting as mentioned above, but
also Statement of Accounting Concepts SAC 3 Characteristics of Financial Information and Statement of
Accounting Concepts SAC 4 Definition and Recognition of the Elements of Financial Statements. However, follow-
ing Australia’s decision to adopt the Australian equivalents of International Financial Reporting Standards
(AIFRS) from 1 January 2005, both SAC 3 and SAC 4 were withdrawn. The former SAC 3 identified the
‘qualitative characteristics’ of financial information that should be contained in GPFRs. Qualitative character-
istics are the ‘ideal’ qualities that a financial report should possess in order to be useful in making commercial
decisions, whereas the objectives of the former SAC 4 were ‘to establish definitions of the major elements of
financial statements and to specify criteria for their recognition’. It should be noted however that, while both
SAC 3 and SAC 4 have been withdrawn, the substance of the statements has been included in the AASB’s
current Framework for the Preparation and Presentation of Financial Statements (usually abbreviated simply as
‘the Framework’ or ‘the AASB Framework’). The Framework is an extensive individual document which (prior
to December 2013) was the third component of the Australian Conceptual Framework and was, and still is,
largely based on the International Accounting Standards Board’s (IASB’s) Conceptual Framework for the Prepa-
ration and Presentation of Financial Statements (the framework which Australia adopted when AIFRS first
became applicable from 1 January 2005). The major financial reporting elements addressed in the Framework
are assets, liabilities, equity, income and expenses, and these have been given brief coverage in the companion
text, Accounting: To Trial Balance. However, the detailed definitions and criteria for recognition of the various
elements in the Framework are lengthy and complex, and beyond the scope of this text.
In summary, the Conceptual Framework in the Australian financial reporting context prior to December
2013 consisted of three components:
1 Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity
2 Statement of Accounting Concepts SAC 2 Objective of General Purpose Financial Reporting, and
3 AASB Framework for the Preparation and Presentation of Financial Statements.
Furthermore, the status of the Conceptual Framework within the GAAP hierarchy is that concepts statements
in their own right do not have mandatory status. This means that there are generally no legal or other
requirements that compel preparers of financial statements to comply with any of the concepts statements.
Despite this, SACs have developed as an important source of guidance for practitioners; for example, SAC 1
is currently used to help identify reporting entities. Also, SACs do have some status indirectly because defini-
tions and other aspects of concepts statements are now very much a part of GAAP and, as discussed above,
many of the components of GAAP are compulsory for many types of business entities. For instance, most of
the definitions relating to financial reporting in concepts statements (assets, liabilities, equity and so forth)
are now included in accounting standards that are mandatory for companies and other entities required to
prepare financial reports under the Corporations Act 2001.
Given the discussion above, it is important for students of accounting to be aware of the various con-
cepts statements and perhaps, for more advanced students, to have a detailed knowledge of the various

6
 Chapter 1 Introduction to accounting: Regulations, reports and systems

sections within the specific concepts statements. For the purposes of this text, a brief description of both
SAC 1 and SAC 2 and the AASB Framework is provided below, although it should be noted that SAC 2
has recently been absorbed into the AASB Framework for the Preparation and Presentation of Financial
Statements following an amendment issued by the AASB in December 2013 (see further details below).

Statement of Accounting Concepts SAC 1

SAC 1 defines reporting entities as those entities in which it is reasonable to expect that there will be users
who depend on GPFRs for information that will aid them in making and evaluating commercial decisions.
What this means is that a reporting entity exists where there are users dependent on financial information;
that is, they are only able to obtain information for their specific needs through comprehensive financial
reports prepared by the business entity. Entities that fall into this category are usually large companies
and listed trusts in which the general public has considerable exposure. General GPFRs are further
explained below, but as a general rule, it can be assumed that most entities are reporting entities except
the following types:
• sole traders
• partnerships
• family trusts
• small proprietary companies.

Statement of Accounting Concepts SAC 2

(withdrawn December 2013)
When operative, SAC 2 defined a General Purpose Financial Report as ‘a financial report intended to meet
the information needs common to users who are unable to command the preparation of reports tailored so
as to satisfy, specifically, all of their information needs’.
Put simply, this means that a GPFR is essentially a comprehensive set of financial statements prepared
in accordance with GAAP; that is, all the legislative requirements and all accounting standards and pro-
nouncements issued by the regulators and by the AASB. It should further be noted that financial reports
other than GPFRs are referred to as Special Purpose Financial Reports (SPFRs) and may take many shapes or
forms depending on the needs of the users who are able to command specific information. For instance, an
SPFR may simply consist of a cash budget requested by a lending institution, or a set of basic financial
statements prepared on a cash basis. Management or internal reports would also be included within the
definition of SPFRs.
SAC 1 requires all reporting entities to prepare GPFRs. Non-reporting entities, however, are not required
to prepared GPFRs and accordingly would normally prepare SPFRs. Thus the financial reports for sole
traders, partnerships, family trusts and small proprietary companies are most likely to be SPFRs.

7
 Accounting Basic Reports

As a result of the AASB issuing AASB CF 2013–1 Amendments to the Australian Conceptual Framework in
December 2013, SAC 2 was withdrawn and no longer applies in Australia. The consequential effects of
these amendments, however, have been to include updated contents of the former SAC 2 into the AASB
Framework for the Preparation and Presentation of Financial Statements.
When the amendments were issued, they had the effect of bringing the Australian Framework in line
with the IASB amendments to the international framework issued in September 2010. (This has now been
renamed the IASB Conceptual Framework for Financial Reporting.) It should be noted that the AASB has not
accepted the IASB’s new title for their amended framework, and thus continues to use the IASB’s former
title Framework for the Preparation and Presentation of Financial Statements. Moreover, the AASB did not
accept the contents of the amended IASB The Conceptual Framework for Financial Reporting issued in 2010,
but rather opted to effect the changes progressively by issuing separate amendment documents, the first
of which is AASB CF 2013–1 Amendments to the Australian Conceptual Framework issued in December 2013.
Thus, as from December 2013, Australia’s conceptual framework consists of the following documents:
• Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (discussed above)
• the AASB’s existing Framework for the Preparation and Presentation of Financial Statements (i.e. not includ-
ing the IASB’s 2010 amendments), and
• AASB CF 2013–1 Amendments to the Australian Conceptual Framework, which is to be read in conjunction
with the existing conceptual framework document above.

The Framework for the Preparation and

Presentation of Financial Statements
As explained in the introduction to the AASB Framework, the purpose of the Framework is to set out the
concepts that underlie the preparation and presentation of financial reports for external users. The Frame-
work must always be read in consultation with any amendments issues by the AASB, including amendment
‘AASB CF 2013-1 Amendments to the Australian Conceptual Framework’ issued in December 2013. In this
regard, the Framework is primarily concerned with the following:
• objectives of financial statements
• assumptions underlying the preparation of financial statements and reports
• qualitative characteristics of financial reports
• elements of financial reports
• recognition criteria for the elements of financial statements.
While an in-depth discussion of the Framework is not covered in this chapter, brief comments in the fol-
lowing paragraphs should help to provide a basic understanding of the major features of the Framework.

Status of the Framework

Consistent with the non-mandatory application of concepts discussed above, the Framework states that
concepts are not set out as requirements for the preparation of GPFRs and also that the Framework is not

8
 Chapter 1 Introduction to accounting: Regulations, reports and systems

an accounting standard. Rather, the intent of the Framework is to provide guidance and assistance to a
range of parties, including preparers of financial reports, auditors and users of financial reports.

Objectives of financial reports

Objective 1
The objective of general purpose financial reporting forms the foundation of the
Framework. Other aspects of the Framework – a reporting entity concept, the
qualitative characteristics of, and the constraint on, useful financial information,
elements of financial statements, recognition, measurement, presentation and
disclosure – flow logically from the objective.
AASB Framework p. 11

Interestingly, the Framework is specifically concerned with general purpose financial reporting, although it
also states that the Framework may be applied in the preparation of SPFRs where requirements permit.

Objective 2
The objective of general purpose financial reporting is to provide financial infor-
mation about the reporting entity that is useful to existing and potential inves-
tors, lenders and other creditors in making decisions about providing resources
to the entity. Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of credit.
AASB Framework p. 11

Assumptions underlying the preparation of reports

Two important bases for the preparation of financial reports are identified by the Framework:
1 the going concern basis, which assumes that the entity is a going concern (i.e. not ceasing to operate)
and will continue operations into the foreseeable future
2 the accrual basis, which requires the effects of transactions to be recognised when they occur (that is,
not necessarily when cash is received or disbursed) and recorded in the periods to which they relate.
Note that the 2013 amendments remove the accrual accounting concepts as a basis for the preparation of
financial statements, but include the following commentary.
Accrual accounting depicts the effects of transactions and other events and circum-
stances on a reporting entity’s economic resources and claims in the periods in which
those effects occur, even if the resulting cash receipts and payments occur in a differ-
ent period. This is important because information about a reporting entity’s economic
resources and claims and changes in its economic resources and claims during a
period provides a better basis for assessing the entity’s past and future performance
than information solely about cash receipts and payments during that period.
AASB Framework p. 15

9
 Accounting Basic Reports

Qualitative characteristics
The 2013 amendments have completely removed the sections covering qualitative characteristics of finan-
cial statements in the existing Framework and have replaced these with new sections tabled in an Appendix
to the amendments. In the introduction to qualitative characteristics, the amendments state that:
The qualitative characteristics of useful financial information discussed in this chapter
identify the types of information that are likely to be most useful to the existing and
potential investors, lenders and other creditors for making decisions about the report-
ing entity on the basis of information in its financial report (financial information).
AASB Framework p. 18

Briefly, the Framework requires that, as a minimum, financial statements should include information that
displays two fundamental qualitative characteristics:
1 information needs to be relevant, and
2 information needs to be faithfully represented if it is to be useful.
The amendments further state that ‘Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and faithfully represented’.
In effect, financial statements should as a minimum be:
• readily understandable
• relevant to the needs of users
• reliable and free from error and bias, and
• comparable.
Further detailed explanations are provided for each of these fundamental and enhancing qualitative charac-
teristics in the Framework.

Existence and recognition of elements of

financial reporting
As already mentioned, assets, liabilities, income, expenses and equity are covered in some depth in the com-
panion text: Accounting: To Trial Balance. Therefore, only a brief summary of the definition of each element
is provided here for the sake of completeness.
• Assets – The Framework defines assets as ‘resources controlled by the enterprise as a result of past
events and from which future economic benefits are expected to flow to the enterprise’.
• Liabilities – The definition of liabilities provided in the Framework states that ‘liabilities are present
obligations of the enterprise arising from past events, settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic benefits’.
• Income – The Framework generally defines income 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’.

10
 Chapter 1 Introduction to accounting: Regulations, reports and systems

• Expenses – These are generally 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’.
• Equity – This is defined as ‘the residual interest in assets of the enterprise after deducting all its
liabilities’.

International Financial Reporting

Standards (IFRS)
With the ever-increasing importance of international trade, Australian standard setters had the foresight in
the early 1990s to recognise the need for comparable accounting standards between countries. The potential
benefits to be gained from Australia having similar financial reporting rules to those of its major trading
partners are substantial, particularly in regard to the facilitation of trade and investment between countries.
Indeed, foreign traders and investors will be able to trade more freely and with less uncertainty with
Australian entities that prepare financial statements using similar rules to those used internationally. Less
uncertainty usually means that the entity will have a lower risk profile, and will therefore be able to borrow
funds at more competitive interest rates and also attract investors requiring more stable rates of return. This
in turn will lower the cost of raising capital and result in considerable cost savings for the entities concerned.
The process of preparing and adopting comparable accounting standards first started in 1996 when the
AASB issued policies that would eventually result in compatibility between Australia and New Zealand’s
accounting standards. This process was referred to as harmonisation, which in general terms was intended
to reduce the differences between accounting standards of different countries. With the increasing impor-
tance and global application of international accounting standards issued by the IASB, Australia’s harmoni-
sation program soon extended to include international accounting standards relevant to the Australian
financial reporting environment. In 2002, the Australian Financial Reporting Council (a statutory body
that oversees the role of the AASB) issued a directive stating that Australia would fully adopt international
accounting standards by 1 January 2005. Full adoption involved a detailed process of convergence, whereby
International Financial Reporting Standards would be used as the stable platform for Australian accounting
standards. This meant that Australia would adopt substantially all of the content and wording of the inter-
national standards, but would include additional text or requirements, or amend the standards, to reflect
conditions specific to the Australian financial reporting environment (for instance, requirements for not-
for-profit entities, which are not specifically covered in the IASB framework). In this sense, then, Australia
has not adopted international standards per se, but has issued Australian equivalents to International
Financial Reporting Standards (hence the use of the popular acronym ‘AIFRS’). Note also that there is a
small number of standards in Australia that do not have an international equivalent, but continue to be in
force for Australian reporting purposes (for example, AASB 1039 Concise Financial Reports). By February
2006, the task of internationalising Australian accounting standards had largely been completed.

11
 Accounting Basic Reports

Compliance with GAAP

While there are several mechanisms in Australia that require entities to comply with the various compo-
nents of GAAP, two are most prevalent: the Corporations Act 2001, which requires certain types of compa-
nies and other entities to prepare financial reports and comply with accounting standards, and the by-laws
of the various professional bodies. The Australian Securities Exchange (not covered in this text) also has
extensive reporting requirements for all entities listed on the Exchange.
The role of professional bodies is an important aspect of any compliance regime. The accounting profes-
sion in Australia is represented by a number of self-regulated bodies, including:
• CPA Australia
• Institute of Chartered Accountants in Australia (ICAA)
• Institute of Public Accountants (IPA).
Membership of a professional body provides accountants with numerous benefits, including professional
recognition and community standing. In return for these benefits, members must comply with strict ethical
by-laws, which ensure that their professional conduct is maintained at the highest level. By-laws also require
members to comply with accounting standards and other pronouncements when preparing financial reports
for certain types of business entities.
Professional bodies also provide members with an extensive body of current technical knowledge
through ongoing research and education. In this respect, CPA Australia and the ICAA have joint respon-
sibility for the operation of the Australian Accounting Research Foundation (AARF), which is a body that
currently undertakes research, formulates auditing standards and reviews legislation that has an impact on
financial reporting.

Reporting requirements for

sole traders
As already mentioned, sole traders are typically non-reporting entities and, except for the owner of the
business and perhaps an external party (for instance, a finance provider) that may have a specific interest
in the entity, there are generally no dependent users. Furthermore, there does not appear to be any manda-
tory or legal requirement for sole traders to prepare financial statements, although it would be most
unusual for them not to do so. Often, for instance, sole traders may compile financial statements to accom-
pany the lodgement of a taxation return (which is mandatory) that may show details of income and
expenses, and also key details of assets and liabilities (for example, balances of stock and written-down
values of property, plant and equipment). More commonly, owners wishing to exercise good management
will often prepare detailed financial reports to better understand and to monitor the operating performance

12
 Chapter 1 Introduction to accounting: Regulations, reports and systems

and financial stability of the business. While these reports are generally regarded as management or internal
reports, it is not uncommon for these reports to reflect all of the conventional accounting principles and
concepts embodied in GAAP; for instance, accrual accounting, historical cost, entity convention, monetary
convention, definitions of the elements of financial reporting and so on. In reality, while this is not manda-
tory, some sole traders will often also apply the methods and procedures prescribed in some accounting
standards to provide greater scope and depth of financial reporting. For instance, the application of mea-
surement standards dealing with inventory, property, plant and equipment, and impairment of assets, is
common. Moreover, other examples include identifying and disclosing material items in preparing specific
financial reports such as the statement of comprehensive income.
In this text, the preparation of basic financial reports for sole traders will reflect the general principles of
accounting embodied in GAAP together with the application of sound accounting practices prescribed by
accounting standards, where relevant.

Design of an accounting
system: Basic issues
To meet the many different requirements for preparing financial reports, an entity must have a well-
designed accounting system that captures information appropriate to the size and nature of the entity. As
outlined in Chapter 1 of Accounting: To Trial Balance, an accounting system consists of the various proce-
dures and records used by an entity to perform its accounting function.
An accounting system must be designed to meet the needs of the users of accounting information.
These will often be determined by several factors, including:
• the nature of the business – For example, the accounting reports prepared for a motor vehicle manufac-
turer would place considerable emphasis on the production function, whereas reports for a legal practice
would emphasise the costs of providing services.
• the size of the business – For example, the accounting reports of a large mining business would be con-
siderably more complicated than those of a small retail business.
• the variety of accounting reports required – The degree of complexity of an accounting system will be
greater, for example, for a public company listed on the Australian Securities Exchange, due to the strin-
gent reporting requirements discussed above.
As a general rule, the more complex the reporting requirements are, the more likely it is that the accounting
system will be computer-based. Computerised accounting systems are now more affordable and most busi-
nesses now have some access to technology-based systems. Computer-based systems offer considerable
advantages over traditional manual systems, including point-of-sale recording, controls over the recording
process, preparation of extensive reports, timely reporting, flexibility in reporting formats and regular sys-
tem upgrades.

13
Another Random Scribd Document
with Unrelated Content
after all which the tutors or servants ought to make diligent inquiry.
As for triumphs, masks, feasts, weddings, funerals, capital
executions, and such shows, men need not to be put in mind of
them; yet they are not to be neglected. If you will have a young
man to put his travel into a little room, and in short time to gather
much, this you must do: first, as was said, he must have some
entrance into the language before he goeth; then he must have such
a servant, or tutor, as knoweth the country, as was likewise said; let
him carry with him also some card or book, describing the country
where he travelleth, which will be a good key to his inquiry; let him
keep also a diary; let him not stay long in one city or town, more or
less, as the place deserveth, but not long; nay, when he stayeth in
one city or town, let him change his lodging from one end and part
of the town to another, which is a great adamant of acquaintance;
let him sequester himself from the company of his countrymen, and
diet in such places where there is good company of the nation where
he travelleth; let him, upon his removes from one place to another,
procure recommendation to some person of quality residing in the
place whither he removeth, that he may use his favor in those things
he desireth to see or know: thus he may abridge his travel with
much profit. As for the acquaintance which is to be sought in travel,
that which is most of all profitable, is acquaintance with the
secretaries and employed men207 of ambassadors, for so in
travelling in one country he shall suck the experience of many; let
him also see and visit eminent persons in all kinds which are of great
name abroad, that he may be able to tell how the life agreeth with
the fame. For quarrels, they are with care and discretion to be
avoided; they are commonly for mistresses, healths,208 place, and
words; and let a man beware how he keepeth company with choleric
and quarrelsome persons, for they will engage him into their own
quarrels. When a traveller returneth home, let him not leave the
countries where he hath travelled altogether behind him, but
maintain a correspondence by letters with those of his acquaintance
which are of most worth; and let his travel appear rather in his
discourse than in his apparel or gesture, and in his discourse let him
be rather advised in his answers, than forward to tell stories; and let
it appear that he doth not change his country manners for those of
foreign parts, but only prick in some flowers of that he hath learned
abroad into the customs of his own country.

XIX.—OF EMPIRE.
It is a miserable state of mind to have few things to desire, and
many things to fear; and yet that commonly is the case of kings,
who, being, at the highest, want matter of desire,209 which makes
their minds more languishing; and have many representations of
perils and shadows, which makes their minds the less clear; and this
is one reason, also, of that effect which the Scripture speaketh of,
“that the king’s heart is inscrutable;”210 for multitude of jealousies,
and lack of some predominant desire, that should marshal and put in
order all the rest, maketh any man’s heart hard to find or sound.
Hence it comes, likewise, that princes many times make themselves
desires, and set their hearts upon toys: sometimes upon a building;
sometimes upon erecting of an order; sometimes upon the
advancing of a person; sometimes upon obtaining excellency in
some art or feat of the hand,—as Nero for playing on the harp;
Domitian for certainty of the hand with the arrow; Commodus for
playing at fence;211 Caracalla for driving chariots, and the like. This
seemeth incredible unto those that know not the principle, that the
mind of man is more cheered and refreshed by profiting in small
things than by standing at a stay212 in great. We see, also, that
kings that have been fortunate conquerors in their first years, it
being not possible for them to go forward infinitely, but that they
must have some check or arrest in their fortunes, turn in their latter
years to be superstitious and melancholy; as did Alexander the
Great, Diocletian,213 and, in our memory, Charles the Fifth,214 and
others; for he that is used to go forward, and findeth a stop, falleth
out of his own favor, and is not the thing he was.
To speak now of the true temper of empire, it is a thing rare and
hard to keep, for both temper and distemper consist of contraries;
but it is one thing to mingle contraries, another to interchange them.
The answer of Apollonius to Vespasian is full of excellent instruction.
Vespasian asked him, “What was Nero’s overthrow?” He answered,
“Nero could touch and tune the harp well; but in government
sometimes he used to wind the pins too high, sometimes to let them
down too low.”215 And certain it is, that nothing destroyeth authority
so much as the unequal and untimely interchange of power pressed
too far, and relaxed too much.
This is true, that the wisdom of all these latter times in princes’
affairs is rather fine deliveries, and shiftings of dangers and
mischiefs, when they are near, than solid and grounded courses to
keep them aloof; but this is but to try masteries with fortune, and let
men beware how they neglect and suffer matter of trouble to be
prepared. For no man can forbid the spark, nor tell whence it may
come. The difficulties in princes’ business are many and great; but
the greatest difficulty is often in their own mind. For it is common
with princes (saith Tacitus) to will contradictories: “Sunt plerumque
regum voluntates vehementes, et inter se contrariæ;”216 for it is the
solecism of power to think to command the end, and yet not to
endure the mean.
Kings have to deal with their neighbors, their wives, their children,
their prelates or clergy, their nobles, their second nobles or
gentlemen, their merchants, their commons, and their men of war;
and from all these arise dangers, if care and circumspection be not
used.
First, for their neighbors, there can no general rule be given (the
occasions are so variable), save one which ever holdeth; which is,
that princes do keep due sentinel, that none of their neighbors do
overgrow so (by increase of territory, by embracing of trade, by
approaches, or the like), as they become more able to annoy them
than they were; and this is generally the work of standing counsels
to foresee and to hinder it. During that triumvirate of kings, King
Henry the Eighth of England, Francis the First, King of France,217
and Charles the Fifth, Emperor, there was such a watch kept that
none of the three could win a palm of ground, but the other two
would straightways balance it, either by confederation, or, if need
were, by a war; and would not, in any wise, take up peace at
interest; and the like was done by that league (which Guicciardini218
saith was the security of Italy) made between Ferdinando, King of
Naples, Lorenzius Medicis, and Ludovicus Sforza, potentates, the one
of Florence, the other of Milan. Neither is the opinion of some of the
schoolmen to be received, that a war cannot justly be made, but
upon a precedent injury or provocation; for there is no question, but
a just fear of an imminent danger, though there be no blow given, is
a lawful cause of a war.
For their wives, there are cruel examples of them. Livia is
infamed219 for the poisoning of her husband; Roxolana, Solyman’s
wife,220 was the destruction of that renowned prince, Sultan
Mustapha, and otherwise troubled his house and succession; Edward
the Second of England’s Queen221 had the principal hand in the
deposing and murder of her husband.
This kind of danger is then to be feared chiefly when the wives have
plots for the raising of their own children, or else that they be
advoutresses.222
For their children, the tragedies likewise of dangers from them have
been many; and generally the entering of fathers into suspicion of
their children hath been ever unfortunate. The destruction of
Mustapha (that we named before) was so fatal to Solyman’s line, as
the succession of the Turks from Solyman until this day is suspected
to be untrue, and of strange blood; for that Selymus the Second was
thought to be supposititious.223 The destruction of Crispus, a young
prince of rare towardness, by Constantinus the Great, his father, was
in like manner fatal to his house; for both Constantinus and
Constance, his sons, died violent deaths; and Constantius, his other
son, did little better, who died indeed of sickness, but after that
Julianus had taken arms against him. The destruction of
Demetrius,224 son to Philip the Second of Macedon, turned upon the
father, who died of repentance. And many like examples there are;
but few or none where the fathers had good by such distrust, except
it were where the sons were up in open arms against them; as was
Selymus the First against Bajazet, and the three sons of Henry the
Second, King of England.
For their prelates, when they are proud and great, there is also
danger from them; as it was in the times of Anselmus225 and
Thomas Becket, Archbishops of Canterbury, who, with their crosiers,
did almost try it with the king’s sword; and yet they had to deal with
stout and haughty kings; William Rufus, Henry the First, and Henry
the Second. The danger is not from that state, but where it hath a
dependence of foreign authority; or where the churchmen come in
and are elected, not by the collation of the King, or particular
patrons, but by the people.
For their nobles, to keep them at a distance it is not amiss; but to
depress them may make a king more absolute, but less safe, and
less able to perform anything that he desires. I have noted it in my
History of King Henry the Seventh of England, who depressed his
nobility, whereupon it came to pass that his times were full of
difficulties and troubles; for the nobility, though they continued loyal
unto him, yet did they not coöperate with him in his business; so
that, in effect, he was fain to do all things himself.
For their second nobles, there is not much danger from them, being
a body dispersed. They may sometimes discourse high, but that
doth little hurt; besides, they are a counterpoise to the higher
nobility, that they grow not too potent; and, lastly, being the most
immediate in authority with the common people, they do best
temper popular commotions.

For their merchants, they are “vena porta:”226 and if they flourish
not, a kingdom may have good limbs, but will have empty veins, and
nourish little. Taxes and imposts upon them do seldom good to the
king’s revenue, for that which he wins227 in the hundred228 he
loseth in the shire; the particular rates being increased, but the total
bulk of trading rather decreased.
For their commons, there is little danger from them, except it be
where they have great and potent heads; or where you meddle with
the point of religion, or their customs, or means of life.
For their men of war, it is a dangerous state where they live and
remain in a body, and are used to donatives; whereof we see
examples in the Janizaries229 and Prætorian bands of Rome; but
trainings of men, and arming them in several places, and under
several commanders, and without donatives, are things of defence
and no danger.
Princes are like to heavenly bodies, which cause good or evil times;
and which have much veneration, but no rest. All precepts
concerning kings are in effect comprehended in those two
remembrances, “Memento quod es homo;”230 and “Memento quod
es Deus,”231 or “vice Dei;”232 the one bridleth their power and the
other their will.

XX.—OF COUNSEL.
The greatest trust between man and man is the trust of giving
counsel; for in other confidences men commit the parts of life, their
lands, their goods, their children, their credit, some particular affair;
but to such as they make their counsellors they commit the whole;
by how much the more they are obliged to all faith and integrity. The
wisest princes need not think it any diminution to their greatness, or
derogation to their sufficiency to rely upon counsel. God himself is
not without, but hath made it one of the great names of his blessed
Son, “The Counsellor.”233 Solomon hath pronounced that, “in counsel
is stability.”234 Things will have their first or second agitation: if they
be not tossed upon the arguments of counsel, they will be tossed
upon the waves of fortune, and be full of inconstancy, doing and
undoing, like the reeling of a drunken man. Solomon’s son235 found
the force of counsel, as his father saw the necessity of it; for the
beloved kingdom of God was first rent and broken by ill counsel;
upon which counsel there are set for our instruction the two marks
whereby bad counsel is forever best discerned, that it was young
counsel for the persons, and violent counsel for the matter.
The ancient times do set forth in figure both the incorporation and
inseparable conjunction of counsel with kings, and the wise and
politic use of counsel by kings; the one, in that they say Jupiter did
marry Metis, which signifieth counsel; whereby they intend that
sovereignty is married to counsel; the other in that which followeth,
which was thus: they say, after Jupiter was married to Metis, she
conceived by him and was with child; but Jupiter suffered her not to
stay till she brought forth, but eat her up; whereby he became
himself with child, and was delivered of Pallas armed, out of his
head.236 Which monstrous fable containeth a secret of empire, how
kings are to make use of their council of state; that first, they ought
to refer matters unto them, which is the first begetting or
impregnation; but when they are elaborate, moulded, and shaped in
the womb of their counsel, and grow ripe and ready to be brought
forth, that then they suffer not their council to go through with the
resolution and direction, as if it depended on them; but take the
matter back into their own hands, and make it appear to the world,
that the decrees and final directions (which, because they come
forth with prudence and power, are resembled to Pallas armed),
proceeded from themselves; and not only from their authority, but
(the more to add reputation to themselves) from their head and
device.
Let us now speak of the inconveniences of counsel, and of the
remedies. The inconveniences that have been noted in calling and
using counsel are three: first, the revealing of affairs, whereby they
become less secret; secondly, the weakening of the authority of
princes, as if they were less of themselves; thirdly, the danger of
being unfaithfully counselled, and more for the good of them that
counsel than of him that is counselled; for which inconveniences, the
doctrine of Italy, and practice of France, in some kings’ times, hath
introduced cabinet councils; a remedy worse than the disease.237
As to secrecy, princes are not bound to communicate all matters
with all counsellors, but may extract and select; neither is it
necessary that he that consulteth what he should do, should declare
what he will do; but let princes beware that the unsecreting of their
affairs comes not from themselves; and, as for cabinet councils, it
may be their motto, “Plenus rimarum sum:”238 one futile person,
that maketh it his glory to tell, will do more hurt than many that
know it their duty to conceal. It is true, there be some affairs which
require extreme secrecy, which will hardly go beyond one or two
persons besides the king. Neither are those counsels unprosperous;
for, besides the secrecy, they commonly go on constantly in one
spirit of direction without distraction; but then it must be a prudent
king, such as is able to grind with a hand-mill;239 and those inward
counsellors had need also to be wise men, and especially true and
trusty to the king’s ends; as it was with King Henry the Seventh of
England, who, in his greatest business, imparted himself to none,
except it were to Morton240 and Fox.241

For weakening of authority, the fable242 showeth the remedy; nay,

the majesty of kings is rather exalted than diminished when they are
in the chair of council; neither was there ever prince bereaved of his
dependencies by his council, except where there hath been either an
over-greatness in one counsellor, or an over-strict combination in
divers, which are things soon found and holpen.243
For the last inconvenience, that men will counsel with an eye to
themselves; certainly, “non inveniet fidem super terram,”244 is meant
of the nature of times,245 and not of all particular persons. There be
that are in nature faithful and sincere, and plain and direct, not
crafty and involved: let princes, above all, draw to themselves such
natures. Besides, counsellors are not commonly so united, but that
one counsellor keepeth sentinel over another; so that if any do
counsel out of faction or private ends, it commonly comes to the
king’s ear; but the best remedy is, if princes know their counsellors,
as well as their counsellors know them:—
 “Principis est virtus maxima nosse suos.”246

And on the other side, counsellors should not be too speculative into
their sovereign’s person. The true composition of a counsellor is,
rather to be skilful in their master’s business than in his nature;247
for then he is like to advise him, and not to feed his humor. It is of
singular use to princes, if they take the opinions of their council both
separately and together; for private opinion is more free, but opinion
before others is more reverend. In private, men are more bold in
their own humors; and in consort, men are more obnoxious248 to
others’ humors; therefore it is good to take both; and of the inferior
sort rather in private, to preserve freedom; of the greater, rather in
consort, to preserve respect. It is in vain for princes to take counsel
concerning matters, if they take no counsel likewise concerning
persons; for all matters are as dead images; and the life of the
execution of affairs resteth in the good choice of persons. Neither is
it enough to consult concerning persons, “secundum genera,”249 as
in an idea or mathematical description, what the kind and character
of the person should be; for the greatest errors are committed, and
the most judgment is shown, in the choice of individuals. It was truly
said, “Optimi consiliarii mortui:”250 “books will speak plain when
counsellors blanch;”251 therefore it is good to be conversant in
them, specially the books of such as themselves have been actors
upon the stage.
The councils at this day in most places are but familiar meetings,
where matters are rather talked on than debated; and they run too
swift to the order or act of council. It were better that in causes of
weight, the matter were propounded one day and not spoken to till
the next day; “In nocte consilium;”252 so was it done in the
commission of union253 between England and Scotland, which was a
grave and orderly assembly. I commend set days for petitions; for
both it gives the suitors more certainty for their attendance, and it
frees the meetings for matters of estate, that they may “hoc
agere.”254 In choice of committees for ripening business for the
council, it is better to choose indifferent persons, than to make an
indifferency by putting in those that are strong on both sides. I
commend, also, standing commissions; as for trade, for treasure, for
war, for suits, for some provinces; for where there be divers
particular councils, and but one council of estate (as it is in Spain),
they are in effect no more than standing commissions, save that
they have greater authority. Let such as are to inform councils out of
their particular professions (as lawyers, seamen, mintmen, and the
like) be first heard before committees; and then, as occasion serves,
before the council; and let them not come in multitudes, or in a
tribunitious255 manner; for that is to clamor councils, not to inform
them. A long table and a square table, or seats about the walls,
seem things of form, but are things of substance; for at a long table
a few at the upper end, in effect, sway all the business; but in the
other form there is more use of the counsellors’ opinions that sit
lower. A king, when he presides in council, let him beware how he
opens his own inclination too much in that which he propoundeth;
for else counsellors will but take the wind of him, and, instead of
giving free counsel, will sing him a song of “placebo.”256

XXI.—OF DELAYS.
Fortune is like the market, where, many times, if you can stay a little,
the price will fall; and again, it is sometimes like Sibylla’s offer,257
which at first offereth the commodity at full, then consumeth part
and part, and still holdeth up the price; for occasion (as it is in the
common verse) “turneth a bald noddle,258 after she hath presented
her locks in front, and no hold taken;” or, at least, turneth the
handle of the bottle first to be received, and after the belly, which is
hard to clasp.259 There is surely no greater wisdom than well to time
the beginnings and onsets of things. Dangers are no more light, if
they once seem light; and more dangers have deceived men than
forced them; nay, it were better to meet some dangers half-way,
though they come nothing near, than to keep too long a watch upon
their approaches; for if a man watch too long, it is odds he will fall
asleep. On the other side, to be deceived with too long shadows (as
some have been when the moon was low, and shone on their
enemies’ back), and so to shoot off before the time; or to teach
dangers to come on by over early buckling towards them, is another
extreme. The ripeness or unripeness of the occasion (as we said)
must ever be well weighed; and generally it is good to commit the
beginnings of all great actions to Argus with his hundred eyes, and
the ends to Briareus with his hundred hands, first to watch and then
to speed; for the helmet of Pluto,260 which maketh the politic man
go invisible, is secrecy in the council, and celerity in the execution;
for when things are once come to the execution, there is no secrecy
comparable to celerity; like the motion of a bullet in the air, which
flieth so swift as it outruns the eye.

XXII.—OF CUNNING.
We take cunning for a sinister, or crooked wisdom; and, certainly,
there is great difference between a cunning man and a wise man,
not only in point of honesty, but in point of ability. There be that can
pack the cards,261 and yet cannot play well; so there are some that
are good in canvasses and factions, that are otherwise weak men.
Again, it is one thing to understand persons, and another thing to
understand matters; for many are perfect in men’s humors that are
not greatly capable of the real part of business, which is the
constitution of one that hath studied men more than books. Such
men are fitter for practice than for counsel, and they are good but in
their own alley. Turn them to new men, and they have lost their aim;
so as the old rule, to know a fool from a wise man, “Mitte ambos
nudos ad ignotos, et videbis,”262 doth scarce hold for them; and,
because these cunning men are like haberdashers263 of small wares,
it is not amiss to set forth their shop.

It is a point of cunning to wait upon264 him with whom you speak

with your eye, as the Jesuits give it in precept; for there be many
wise men that have secret hearts and transparent countenances; yet
this would be done with a demure abasing of your eye sometimes,
as the Jesuits also do use.
Another is, that when you have any thing to obtain of present
dispatch, you entertain and amuse the party with whom you deal
with some other discourse, that he be not too much awake to make
objections. I knew a counsellor and secretary that never came to
Queen Elizabeth of England, with bills to sign, but he would always
first put her into some discourse of estate,265 that she might the
less mind the bills.

The like surprise may be made by moving things266 when the party
is in haste, and cannot stay to consider advisedly of that is moved.
If a man would cross a business that he doubts some other would
handsomely and effectually move, let him pretend to wish it well,
and move it himself, in such sort as may foil it.
The breaking off in the midst of that one was about to say, as if he
took himself up, breeds a greater appetite in him with whom you
confer to know more.
And because it works better when any thing seemeth to be gotten
from you by question than if you offer it of yourself, you may lay a
bait for a question, by showing another visage and countenance
than you are wont; to the end, to give occasion for the party to ask
what the matter is of the change, as Nehemiah267 did: “And I had
not, before that time, been sad before the king.”
In things that are tender and unpleasing, it is good to break the ice
by some whose words are of less weight, and to reserve the more
weighty voice to come in as by chance, so that he may be asked the
question upon the other’s speech; as Narcissus did, in relating to
Claudius the marriage268 of Messalina and Silius.
In things that a man would not be seen in himself, it is a point of
cunning to borrow the name of the world; as to say, “The world
says,” or “There is a speech abroad.”
I knew one, that when he wrote a letter, he would put that which
was most material in a postscript, as if it had been a by-matter.

I knew another, that when he came to have speech,269 he would

pass over that that he intended most; and go forth and come back
again, and speak of it as a thing that he had almost forgot.
Some procure themselves to be surprised at such times as it is like
the party that they work upon will suddenly come upon them, and to
be found with a letter in their hand, or doing somewhat which they
are not accustomed, to the end they may be apposed of270 those
things which of themselves they are desirous to utter.
It is a point of cunning to let fall those words in a man’s own name,
which he would have another man learn and use, and thereupon
take advantage. I knew two that were competitors for the
secretary’s place in Queen Elizabeth’s time, and yet kept good
quarter271 between themselves, and would confer one with another
upon the business; and the one of them said, that to be a secretary
in the declination of a monarchy was a ticklish thing, and that he did
not affect it;272 the other straight caught up those words, and
discoursed with divers of his friends, that he had no reason to desire
to be secretary in the declination of a monarchy. The first man took
hold of it, and found means it was told the queen, who, hearing of a
declination of a monarchy, took it so ill, as she would never after
hear of the other’s suit.
There is a cunning, which we in England call “the turning of the cat
in the pan;” which is, when that which a man says to another, he
lays it as if another had said it to him; and, to say truth, it is not
easy, when such a matter passed between two, to make it appear
from which of them it first moved and began.
It is a way that some men have, to glance and dart at others by
justifying themselves by negatives; as to say, “This I do not;” as
Tigellinus did towards Burrhus: “Se non diversas spes, sed
incolumitatem imperatoris simpliciter spectare.”273
Some have in readiness so many tales and stories, as there is
nothing they would insinuate, but they can wrap it into a tale;274
which serveth both to keep themselves more in guard, and to make
others carry it with more pleasure.
It is a good point of cunning for a man to shape the answer he
would have in his own words and propositions; for it makes the
other party stick the less.
It is strange how long some men will lie in wait to speak somewhat
they desire to say; and how far about they will fetch,275 and how
many other matters they will beat over to come near it. It is a thing
of great patience, but yet of much use.
A sudden, bold, and unexpected question doth many times surprise
a man, and lay him open. Like to him, that, having changed his
name, and walking in Paul’s,276 another suddenly came behind him
and called him by his true name, whereat straightways he looked
back.
But these small wares and petty points of cunning are infinite, and it
were a good deed to make a list of them; for that nothing doth more
hurt in a state than that cunning men pass for wise.

But certainly, some there are that know the resorts277 and falls278 of
business that cannot sink into the main of it;279 like a house that
hath convenient stairs and entries, but never a fair room. Therefore
you shall see them find out pretty looses280 in the conclusion, but
are noways able to examine or debate matters; and yet commonly
they take advantage of their inability, and would be thought wits of
direction. Some build rather upon the abusing of others, and (as we
now say) putting tricks upon them, than upon soundness of their
own proceedings; but Solomon saith: “Prudens advertit ad gressus
suos; stultus divertit ad dolos.”281

XXIII.—OF WISDOM FOR A MAN’S SELF.

An ant is a wise creature for itself, but it is a shrewd282 thing in an

orchard or garden; and certainly, men that are great lovers of
themselves waste the public. Divide with reason between self-love
and society; and be so true to thyself as thou be not false to others,
specially to thy king and country. It is a poor centre of a man’s
actions, himself. It is right earth; for that only stands fast upon his
own centre;283 whereas all things that have affinity with the
heavens, move upon the centre of another, which they benefit. The
referring of all to a man’s self is more tolerable in a sovereign prince,
because themselves are not only themselves, but their good and evil
is at the peril of the public fortune; but it is a desperate evil in a
servant to a prince, or a citizen in a republic; for whatsoever affairs
pass such a man’s hands, he crooketh them to his own ends, which
must needs be often eccentric to the ends of his master or state.
Therefore, let princes or states choose such servants as have not
this mark; except they mean their service should be made but the
accessary. That which maketh the effect more pernicious is, that all
proportion is lost. It were disproportion enough for the servant’s
good to be preferred before the master’s; but yet it is a greater
extreme, when a little good of the servant shall carry things against
a great good of the master. And yet that is the case of bad officers,
treasurers, ambassadors, generals, and other false and corrupt
servants; which set a bias upon their bowl, of their own petty ends
and envies, to the overthrow of their master’s great and important
affairs; and, for the most part, the good such servants receive is
after the model of their own fortune; but the hurt they sell for that
good is after the model of their master’s fortune. And certainly, it is
the nature of extreme self-lovers, as they will set a house on fire, an
it were but to roast their eggs; and yet these men many times hold
credit with their masters, because their study is but to please them,
and profit themselves; and for either respect they will abandon the
good of their affairs.
Wisdom for a man’s self is, in many branches thereof, a depraved
thing. It is the wisdom of rats, that will be sure to leave a house
somewhat before it fall; it is the wisdom of the fox, that thrusts out
the badger who digged and made room for him; it is the wisdom of
crocodiles, that shed tears when they would devour. But that which
is specially to be noted is, that those which (as Cicero says of
Pompey) are “sui amantes, sine rivali,”284 are many times
unfortunate; and whereas they have all their times sacrificed to
themselves, they become in the end themselves sacrifices to the
inconstancy of fortune, whose wings they thought by their self-
wisdom to have pinioned.

XXIV.—OF INNOVATIONS.
As the births of living creatures at first are ill-shapen, so are all
innovations, which are the births of time; yet, notwithstanding, as
those that first bring honor into their family are commonly more
worthy than most that succeed, so the first precedent (if it be good)
is seldom attained by imitation; for ill to man’s nature as it stands
perverted, hath a natural motion strongest in continuance, but good,
as a forced motion, strongest at first. Surely, every medicine285 is an
innovation, and he that will not apply new remedies must expect
new evils, for time is the greatest innovator; and if time, of course,
alter things to the worse, and wisdom and counsel shall not alter
them to the better, what shall be the end? It is true, that what is
settled by custom, though it be not good, yet, at least, it is fit; and
those things which have long gone together, are, as it were,
confederate within themselves;286 whereas new things piece not so
well; but, though they help by their utility, yet they trouble by their
inconformity; besides, they are like strangers, more admired and less
favored. All this is true, if time stood still, which, contrariwise,
moveth so round, that a froward retention of custom is as turbulent
a thing as an innovation; and they that reverence too much old
times are but a scorn to the new. It were good, therefore, that men
in their innovations would follow the example of time itself, which
indeed innovateth greatly, but quietly, and by degrees scarce to be
perceived; for, otherwise, whatsoever is new is unlooked for, and
ever it mends some and pairs287 other; and he that is holpen, takes
it for a fortune, and thanks the time; and he that is hurt, for a
wrong, and imputeth it to the author. It is good, also, not to try
experiments in states, except the necessity be urgent, or the utility
evident; and well to beware that it be the reformation that draweth
on the change, and not the desire of change that pretendeth the
reformation; and lastly, that the novelty, though it be not rejected,
yet be held for a suspect,288 and, as the Scripture saith, “That we
make a stand upon the ancient way, and then look about us, and
discover what is the straight and right way, and so to walk in it.”289

XXV.—OF DISPATCH.
Affected dispatch is one of the most dangerous things to business
that can be; it is like that which the physicians call predigestion, or
hasty digestion, which is sure to fill the body full of crudities, and
secret seeds of diseases. Therefore, measure not dispatch by the
times of sitting, but by the advancement of the business; and as in
races, it is not the large stride, or high lift, that makes the speed, so
in business, the keeping close to the matter, and not taking of it too
much at once, procureth dispatch. It is the care of some, only to
come off speedily for the time, or to contrive some false periods of
business, because they may seem men of dispatch; but it is one
thing to abbreviate by contracting,290 another by cutting off; and
business so handled at several sittings, or meetings, goeth
commonly backward and forward in an unsteady manner. I knew a
wise man291 that had it for a byword, when he saw men hasten to a
conclusion, “Stay a little, that we may make an end the sooner.”
On the other side, true dispatch is a rich thing; for time is the
measure of business, as money is of wares; and business is bought
at a dear hand where there is small dispatch. The Spartans and
Spaniards have been noted to be of small dispatch: “Mi venga la
muerte de Spagna;” “Let my death come from Spain;” for then it will
be sure to be long in coming.
Give good hearing to those that give the first information in
business, and rather direct them in the beginning, than interrupt
them in the continuance of their speeches; for he that is put out of
his own order will go forward and backward, and be more tedious
while he waits upon his memory, than he could have been if he had
gone on in his own course; but sometimes it is seen that the
moderator is more troublesome than the actor.
Iterations are commonly loss of time; but there is no such gain of
time as to iterate often the state of the question; for it chaseth away
many a frivolous speech as it is coming forth. Long and curious
speeches are as fit for dispatch as a robe, or mantle, with a long
train, is for a race. Prefaces, and passages,292 and excusations,293
and other speeches of reference to the person, are great wastes of
time; and though they seem to proceed of modesty, they are
bravery.294 Yet beware of being too material when there is any
impediment, or obstruction in men’s wills; for preoccupation of
mind295 ever requireth preface of speech, like a fomentation to
make the unguent enter.
Above all things, order and distribution, and singling out of parts, is
the life of dispatch, so as the distribution be not too subtile; for he
that doth not divide will never enter well into business; and he that
divideth too much will never come out of it clearly. To choose time is
to save time; and an unseasonable motion is but beating the air.
There be three parts of business,—the preparation; the debate, or
examination; and the perfection. Whereof, if you look for dispatch,
let the middle only be the work of many, and the first and last the
work of few. The proceeding, upon somewhat conceived in writing,
doth for the most part facilitate dispatch; for though it should be
wholly rejected, yet that negative is more pregnant of direction than
an indefinite, as ashes are more generative than dust.

XXVI.—OF SEEMING WISE.

It hath been an opinion, that the French are wiser than they seem,
and the Spaniards seem wiser than they are; but howsoever it be
between nations, certainly it is so between man and man; for, as the
apostle saith of godliness, “Having a show of godliness, but denying
the power thereof,”296 so certainly there are, in points of wisdom
and sufficiency, that do nothing, or little very solemnly,—“magno
conatu nugas.”297 It is a ridiculous thing, and fit for a satire to
persons of judgment, to see what shifts these formalists have, and
what prospectives to make superficies to seem body, that hath depth
and bulk. Some are so close and reserved, as they will not show
their wares but by a dark light, and seem always to keep back
somewhat; and when they know within themselves they speak of
that they do not well know, would nevertheless seem to others to
know of that which they may not well speak. Some help themselves
with countenance and gesture, and are wise by signs; as Cicero
saith of Piso, that when he answered him, he fetched one of his
brows up to his forehead, and bent the other down to his chin:
“Respondes, altero ad frontem sublato, altero ad mentum depresso
supercilio; crudelitatem tibi non placere.”298 Some think to bear it by
speaking a great word, and being peremptory; and go on, and take
by admittance that which they cannot make good. Some,
whatsoever is beyond their reach, will seem to despise or make light
of it as impertinent or curious, and so would have their ignorance
seem judgment. Some are never without a difference, and
commonly by amusing men with a subtilty, blanch the matter; of
whom A. Gellius saith, “Hominem delirum, qui verborum minutiis
rerum frangit pondera.”299 Of which kind also Plato, in his
Protagoras, bringeth in Prodicus in scorn, and maketh him make a
speech that consisteth of distinctions from the beginning to the
end.300 Generally such men, in all deliberations, find ease to be301
of the negative side, and affect a credit to object and foretell
difficulties; for when propositions are denied, there is an end of
them, but if they be allowed, it requireth a new work; which false
point of wisdom is the bane of business. To conclude, there is no
decaying merchant, or inward beggar,302 hath so many tricks to
uphold the credit of their wealth, as these empty persons have to
maintain the credit of their sufficiency. Seeming wise men may make
shift to get opinion, but let no man choose them for employment;
for certainly, you were better take for business a man somewhat
absurd than over-formal.

XXVII.—OF FRIENDSHIP.
It had been hard for him that spake it, to have put more truth and
untruth together in few words than in that speech: “Whosoever is
delighted in solitude, is either a wild beast or a god:”303 for it is
most true, that a natural and secret hatred and aversion towards
society in any man hath somewhat of the savage beast; but it is
most untrue, that it should have any character at all of the divine
nature, except it proceed, not out of a pleasure in solitude, but out
of a love and desire to sequester a man’s self for a higher
conversation; such as is found to have been falsely and feignedly in
some of the heathen; as Epimenides,304 the Candian; Numa, the
Roman; Empedocles, the Sicilian; and Apollonius, of Tyana; and truly
and really in divers of the ancient hermits and holy fathers of the
church. But little do men perceive what solitude is, and how far it
extendeth; for a crowd is not company, and faces are but a gallery
of pictures, and talk but a tinkling cymbal, where there is no love.
The Latin adage meeteth with it a little: “Magna civitas, magna
solitudo:”305 because in a great town friends are scattered, so that
there is not that fellowship, for the most part, which is in less
neighborhoods: but we may go further, and affirm most truly, that it
is a mere and miserable solitude to want true friends, without which
the world is but a wilderness; and even in this sense also of solitude,
whosoever in the frame of his nature and affections is unfit for
friendship, he taketh it of the beasts, and not from humanity.
A principal fruit of friendship is the ease and discharge of the fulness
and swellings of the heart, which passions of all kinds do cause and
induce. We know diseases of stoppings and suffocations are the
most dangerous in the body, and it is not much otherwise in the
mind. You may take sarza306 to open the liver, steel to open the
spleen, flower of sulphur for the lungs, castoreum307 for the brain,
but no receipt openeth the heart but a true friend, to whom you may
impart griefs, joys, fears, hopes, suspicions, counsels, and
whatsoever lieth upon the heart to oppress it, in a kind of civil shrift
or confession.
It is a strange thing to observe how high a rate great kings and
monarchs do set upon this fruit of friendship whereof we speak; so
great, as they purchase it many times at the hazard of their own
safety and greatness; for princes, in regard of the distance of their