Overview of Islamic Accounting

7/30/2019 Overview of Islamic Accounting

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• LEARNING OBJECTIVES

• Appreciate what is meant by Islamic

Accounting and the purpose it has

served over time

•

Explain the importance of understanding Islamic accounting

theories.



CONTRAST OF ISLAMIC ACCOUNTING TO

TRADITIONAL ACCOUNTING

• Definition

•

Islamic Accounting - Accounting process which provides appropriate information

[not only financial data] to stakeholders

of an entity that will enable them to ensure

that the entity is continuously operating

within the limits of Islamic Shari’ah and

delivering on its socioeconomic objectives.



• Conventional Accounting

• Accounting process aims to allow

informed decisions whose ultimate

purpose is to efficiently allocate

scarce resources available to their

most efficient [and profitable] uses

by providing information efficiency in

the market.



• Operations

• Islamic Accounting: In operational, itperforms everything within the limits

of Islamic Shari’ah.

• Conventional Accounting: In

operational, it allows everything toachieve maximum profit

•



• Nature

• Islamic Accounting: It is

conceptualized based on the Islamic

principles

•

Conventional Accounting: It isconceptualized based on principles of

secularism and capitalism



• Governance

• Islamic Accounting: It is governed by

Al- Qur’an and Sunnah or Islamic

Shari’ah

•

Conventional Accounting: It is governby Accounting and commercial law

and Secular Ethics.



• ORIENTATION

• Islamic Accounting: It is always society

or community oriented

• Conventional Accounting: It is always

firm or individual oriented



• Cost or Price

• Islamic Accounting: Market or Selling

price rather than Historical cost is

preferred

• Conventional Accounting: Historical

cost rather than Market price is

preferred



• Disclosure

• Islamic Accounting: Full disclosure tosatisfy any reasonable demand forinformation in accordance with theShari’ah

•

Conventional Accounting: Limiteddisclosure provision of informationsubject to public interest



• Unit of Measurement

• Islamic Accounting: Quantity based and

monetary based [Zakat calculation]

• Conventional Accounting: Monetary

value based



• Accounting Period

• Islamic Accounting: One lunar year for

Zakat calculation

• Conventional Accounting: Periodical

measurement of performance



• Equity

• Islamic accounting: Recognize each

party equally

• Conventional Accounting: Survival of the

fittest



• Profit

• Islamic Accounting: Determine accurate

and reasonable profit

• Conventional Accounting: Tries to

maximize profit



• Ownership

• Islamic Accounting: It recognizes

relative ownership on assets

• Conventional Accounting: It recognizes

absolute ownership on assets and firm



• Accountability

• Islamic Accounting: Publicaccountability focusing on thecommunity who participate in exploitingresources

•

Conventional Accounting: Personalaccountability focusing on individuals who control resources



• Conservatism

• Islamic Accounting: Most favourable to

society [justice]

• Conventional Accounting: Most

favourable impact on owners and least

favourable to society



• Consistency

• Islamic Accounting: Consistency based

on Shari’ah

• Conventional Accounting: consistency

based on GAAP



• Going Concern

• Islamic Accounting: Business continues

not forever but depends on contractual

agreement between parties

• Conventional Accounting: Business

continues forever or unlimited period of

time



• Objectives of Financial Statements

Balance

Sheet

Financial

Trust and

Obligations

Financial

Position

Income

Statement

Fulfilment of

Faith

Economic

Performance

Cash Flow CashEntrusted

CashPosition

Equity

Statement

Wealth

Entrusted

Wealth

Ownership



• Features of Islamic Accounting

No different in terms of recording (doubleentry system)

Clear distinction of Accounting Objectivesi.e. religious obligation vs. commercialobligation (different significance of financial statements)

Different users information need

(legitimate and equitable transactions and wealth vs. maximization of wealth andeconomic consequences)



• Features of Islamic Accounting ( cont.)

Compliance with the principles and rules

of Syari’ah

Different Islamic contractual relationships(mudarabah instrument; murabahah etc.)

Distinct accountability relationships (to

Allah SWT and Ummah)Determination of zakat



• User Groups of Accounting

Information for Islamic Banks

Investors (potential and existing)

(lawful and equitable investment)Creditors (potential and existing)

(lawful trade assets)

Regulators



• User Groups of AccountingInformation for Islamic Banks

Syari’ah Supervisory Board & Advisory Council (syari’ahcompliance)

Customers (lawful goods andservices)

Others who may be effected by thedisclosure or non-disclosure of information



•

Statement of Financial Position

Income Statement

Cash Flow Statement

Statement of changes in equity

Statement of sources and uses of good

faith qard fundStatement of sources and uses of zakah

and charity fund



• DISCLOSURE

• Statement of Financial Position

•

Cash and cash equivalent

Receivables ( Murabaha, Salam, Istisnaa)

Investment securities

Mudarabah investment

Musharakah investmentInvestment in other entities

Inventories



• (cont.)

Investment in real estate

Assets acquired for leasing

Other investments (disclosure of their types)

Fixed assets (disclosure of depreciation for significant asset types )

Other assets (disclosure of significant

types)

Note: No “current/fixed” groupings



• DISCLOSURE (cont.)

•

Current accounts, saving accounts andother accounts with separate disclosure of each category

Deposits of other banks

Salam Payable

Istisnaa Payable

Declared but undistributed profitsZakah and taxes payable

Other accounts payable




•

Financial Institutions’ investment accountsCustomer’s investment accounts

•

Share capital

Treasury shares

Share premium

ReservesProposed appropriations




Income Statement

• Revenues and gains from investments

• (-)Expenses and losses from investments

•

Income (loss) from investments• (-) Share of unrestricted investment

account holders in income (loss) from

investments before the bank’s share asMudarib

• (=)The bank’s share in income (loss) from

investments



• (+)The bank’s share in unrestrictedinvestment income as Mudarib

• (+) The bank’s share in restrictedinvestment profit as Mudarib

• (+)The bank’s fixed fee as an investmentagent for restricted investment

• (=/-) Other revenues, expenses, gains andlosses

• (-) General and administrative expenses• (=) Net income (loss) before Zakah and

taxes• (-) Zakah and taxes ( separate disclosures)• (=) Net income (loss)



• Financial statement for changes in restricted

investments

• Restricted investments are not assets of theIslamic bank and should not be reflected in the bank’s statement of financial position.

•

•

The statement must show deposits and withdrawals by holders of restrictedinvestments and their equivalent as of a given date.



•

• A fixed obligation calculated by reference

to net assets that have appreciated or have the

capacity to appreciate over a specific period of

time except for assets acquired for consumption

or used in production.

• Zakah should be

based on the company’s net assets, and the totalamount be divided between owners.

•



•

• The period covered by the statement

• Bank’s responsibility for the payment of

Zakah on behalf of owners of unrestricted investment accounts and their equivalents.

• Payments and uses of funds during theperiod and available funds at the end of the period.



THANK YOU

Overview of Islamic Accounting

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