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ACCOUNTING IN ISLAM

AHMAD HAFIZ BIN RUSLI 2009828422AISYAH AHMAD SAZILI 2009834514MARIA BINTI MOHD YUSOFF 2008297254 NOR ZAHIDAH ABD RAZAK 2008296784NOR AZIRA MUHAMMAD 2008296926

HISTORY

Associated with the imposition of zakat in 2H.

First documented by Al-Khawarizmy in 365H

Seven specific accounting systems were practiced in the Islamic state by Al-Khawarizmy.

Development of accounting was practiced by Indian accountant. (Lall Nigam-1986)

The practices were derived from Arabs where there were similarity in Arab & Indian language. (Scorgie)

Double-entry accounting was practiced in Near East before Pacioli era.

Accounting record was outlined by Luca Pacioli in 1494.

A feature of Pacioli’s Summa was the use of Arabic numbers.

Italian trader obtained knowledge of business method from Muslim counterparts. (Alfred Lieber-1968)

DESCRIBE ISLAMIC ACCOUNTING

Definition Objective and

Characteristic of Islamic Accounting

Fundamental Islamic Value to Business

Activities

Definition• Consideration of Shari’ah in

accounting method and process

• To ensure the organization’s operations carried out under Shari’ah.

Objective and characteristics • There are four main objectives in

Islamic accounting, they are:

1. Decision usefulness2. Stewardship3. Islamic accountability4. Accountability through Zakat

Fundamental Islamic values to business activities

• Ethical values and code of conduct are the things stressed out by Islam.

• There are two fundamental values that can be associated to business activities, they are:

1. Adala (justice)2. Ihsan (benevolence)

THE NEEDS FOR ISLAMIC ACCOUNTING

To cater for different views and values

Different worldviews and values give rise to a different economic system - need different accounting systems which are consistent with that system. (Hameed, 2001) The conventional accounting separates economic intercourse with religious considerations, focuses in individual satisfaction and uses profit measurement as proof of success. (Baydoun Wilet, 2000) Islam is an integrated way of life that combines all aspects -politics, economics, religion and culture.

Ensure Shari’ah complianceEstablishment of various Islamic institutions in Muslim countries. Malaysia -Islamic Bank and Tabung Haji. Established to meet socio-economic objectives of Shari’ah which means Islamic Law.Islamic accounting is needed to :– ensure that these Islamic organizations adhere to the

principles of Shari’ah– monitor whether they meet the Islamic objectives

Examples are Zakat and prohibition of interest in business dealings.

To ensure equitable wealth allocationConventional accounting seems to be serving the elite group of financiers who funds them. May neglect the society at large. Accused of helping a group of rich people get richer (Gray et al, 1996). Islamic accounting serves the entire stakeholders without favoring any group. Islamic accounting - can ensure the corporations are Shari’ah compliance, be accountable in their dealings, generate profit ethically, make equitable allocation and distribution of wealth among members of society and the stakeholders (Shahul).

To ensure consistent behaviour with Islamic norms (Homeo Islamicus)

The use of conventional accounting based on secular philosophical values may be inconsistent with Islamic values and norms.Conventional accounting is made to meet the socio-economic objectives of secular capitalist economic, not Islamic economic system. Lead to inconsistent or deviant behavior of Muslim users, which is called Homeo Economicus. Rational to develop Islamic accounting - to have an ethical accounting system that also measures social, environmental and religious performance, not merely the profit.

DIFFERENCES BETWEEN ISLAMIC

AND CONVENTIONAL ACCOUNTING

CONVENTIONAL ISLAMIC

SECULAR RELIGIOUS

MOHD IBRAHIM 2001

INDIVIDUALITY-ORIENTED COMMUNAL/ SOCIETY-ORIENTED

TOSHIKAZU HAYASHI “ON ISLAMIC ACCOUNTING”

MODERN COMMERCIAL AL-QURAN AND AS-SUNNAH

LIMITED DISCLOSURE FULL DISCLOSURE

CORPORATE REPORTING FROM AN ISLAMIC PERSPECTIVE

Financial measurement aspect

Disclosure and presentation

Financial Measurement Aspect Zakat is a cornerstone of determining measurement tools.

There are some reasons for taking Zakat as the main focus of measurement issues:Concept in Islam that deals specifically with measurement of

assetZakat is one out of five Islamic pillars

Mirza & Baydoun (2000) - Islamic accounting is likely to use historical cost and market selling price

Zakat is calculated based on current price.

Disclosure and Presentation To fulfill the duties and obligations according to the Islamic

Shariah.

To achieve this purpose, an Islamic enterprise is expected to disclose at least: any prohibited transactions they made Zakat obligation they have to pay and have already paid social responsibility

Mirza & Baydoun (2000) - It emphasis on transparency and avoidance of manipulation

Khan (1994) - is pessimistic about this principle especially on firms disclosing negative information about themselves

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