Islamic Accounting research

1. Accounting Systems Accounting Systems Accounting Systems Accounting Systems
Accounting Systems Accounting Systems Accounting Systems
Accounting Systems
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Islamic Accounting Systems and Practices
Dr. Syed Mohammad Ather FCMA*
Md.Hafij Ullah**
Introduction:
Islam is a complete code of life (Al-Qur’an, 5:3) because Allah (SWT)
and Allah’s messenger Prophet Mohammad (SAW) gave us
guidelines regarding every aspect of human life to be dealt with (Al-
Qur’an, 16:89). Allah (SWT) said, “This day, I have perfected your
religion for you, completed My favor upon you, and have chosen for
Islam as your religion--.”(Al-Qur’an, 5:3) So, Islam is not only a religion
like other religion based on belief but it is an integrated way of life
combining all spheres of life such as individual, social, economic,
political, cultural, religious, etc. Accounting is an integral part of the
economic life of a person or organization to recognize, measure,
record the financial transactions and present the financial position in
different financial statements. The interested parties use these
statements for making different decisions which is highly affected
based on the accuracy, reliability and objectivity of the information
and its presentation. Such decisions are expected to be effective and
relevant for the Muslims when the presentation of accounting
information is done following Islamic ethics and values. About
recording, Allah (SWT) said (Al-Qur’an, 2:199); “O you who believe!
When you contract a debt for a fixed period, write it down. Let a
Scribe write it down in justice between you. Let not the Scribe refuse
to write as Allah has taught him, so let him write.---you should not
become weary (your contract), whether it be small or big, for its fixed
term, that is more just with Allah; more solid as evidence, and more
convenient to prevent doubt among yourselves...” Accounting is an
important way of presenting the performance (financial and
economic) of an organization. But the presentation or practices of
accounting differ from country to country and organization to
organization due to educational, sociological, economic, political,
legal, technological factors and organizational typology (Hye, 1988).
In business organization the accounting practices are influenced by
its profit motive while in the non-profit organization the same is
affected by its service orientation (Hossain & Rashid, 1992).
Ideological or ethical differences may also influence accounting
* Dr.Syed Mohammad Ather FCMA,Professor,Department of Management Studies ,Faculty
of Business Administration,University of Chittagong,Chittagong,Bangladesh.
** Mr.Md.Hafij Ullah,Lecturer,Department of Business Administration,Faculty of Business
Studies,International Islamic University,Chittagong.
Abstract: Allah (SWT) and His Messenger Mohammad (SAW) gave us guidelines regarding all aspects of our life to deal
successfully in this earth and to get salvation in hereafter. Accounting is also an integral part of our life.This article gives us an
introduction to Islamic Accounting and its contrast to Traditional Accounting.This article also identifies the basic features and
objectives of Islamic Accounting, justifies the need for the development of a separate accounting system for the Islamic
Organizations,and analyzes the traditional concepts of accounting in the Islamic point of view.The proposition of the article is
that the role of accounting and accountants would be more accurate, effective, complete and fair if any firms and
organizations follow Islamic accounting.
Keywords: Islamic Accounting,Conventional Accounting,Islamic Shari’ah.
practices. The different worldviews and values give rise to different
economic systems and thus need different accounting systems being
consistent with them (Hameed, 2000). As per the survey result, 100%
of the respondents agreed that the concepts of traditional
accounting and Islamic accounting are not same (See Appendix-2).
Rationale of the Study:
Islamic Accounting is a new concept which is now highly recognized
by the Muslim Accountants throughout the world for applying in
recording and presenting the financial transactions of different
organizations.As far as our knowledge concerns,very few works were
done to enrich this field to be applied practically.Hence,this work is a
modest endeavor to develop the field of Islamic Accounting for
practical application.
Objectives of the Study:
The main objective of the study is two-fold,i.e.,to give an overview of
Islamic Accounting System and its adjustments for use and
applications in the streams of Islamic economy and business by the
Muslims. To achieve the main objective, the study sets the following
specific objectives:
1. To justify the need for an Islamic Accounting system.
2. To evaluate the existing concepts of traditional accounting in
Islamic perspective.
3. To differentiate between Conventional Accounting and Islamic
Accounting.
4. To delineate a process of Islamic Accounting to be applied in the
organization.
Methodology of the Study:
The methodology followed in this study is mainly of library work
basically based on the study of the Holy Qur’an, Hadiths and related
literatures written in conventional and Islamic perspective. Of course
some primary survey of opinion data was also made.Thus the article
is a hybrid of primary and secondary data. Opinion data were
measured by Likert type summated rating scales. Simple statistical
techniques e. g. frequency table and modal averages were used to
summarize the primary data and information.
Islamic Accounting Defined:
The branch of accounting which sets its goals and performs all of its
activities to achieve those goals ethically and objectively within the
limits and boundary of Islamic Shari’ah is called Islamic Accounting.
According to Hameed (1), Islamic Accounting may be defined as the
“accounting process” which provides appropriate information (not
necessarily limited to financial data) to stakeholders of an entity
which will enable them to ensure that the entity is continuously
operating within the bounds of the Islamic Shari’ah and delivering on
its socioeconomic objectives to evaluate their own accountabili-ties
to Allah.
Features and Objectives of Islamic Accounting:
Islamic accounting has some features and objectives which are
highly differentiated from traditional accounting. Triyuwono (2000)
stated some features and objectives of Islamic accounting such as: (a)
the transformation from profit maximization to Zakat maximization
(as an emphasis of the welfare of the society, not only individual
interest), (b) Any activity (accounting) policy must comply with the
Islamic Shari’ah (as Muslims are bound to do this), (c) it would
inherently incorporate a balance between individual character and
social character (Muslims are the most generous community who
look after the welfare of others), (d) the enterprise would be
encouraged to participate in releasing humans from the oppression
of economic, social and intellectual factors and releasing the
environment from human exploitation (providing accurate and
appropriate information for making decision, setting appropriate
prices of the products, through equitable distribution of wealth, and
retaining the environment favorable through green reporting), (e) it
provides a bridge between the world and the hereafter (every
Muslim has a final goal is to enter into Jannat achieving the
satisfaction of Allah through performing good deeds in this world).
Needs and Development of Islamic Accounting:
As per the survey result, 90% of the respondents agreed (among
them 50% strongly agreed) that it is necessary to have a separate
Accounting system for Islamic organizations to achieve their specific
Islamic objectives (See Appendix-2). The new dimension of
accounting, i.e., Islamic Accounting is essential for some practical
reasons which are discussed below:
1. Limitations of Conventional accounting:
The conventional accounting provides only the information required
to make different decisions by the users of accounting information
but it does not disclose the environmental affects, social costs, other
religious transactions of an entity. Therefore, the traditional
accounting provides the partial information which might lead to
wrong decision and wrong dealings of the organizations. On the
other hand, Islamic accounting provides all the information including
social, environmental, and religious transactions as per their
accountability and justice to the related parties and also as per their
accountability to almighty Allah (SWT) (Shahul and Yaya,2003).
2. Compliance to Qur’an and Sunnah:
Every Muslim has a final purpose of life of having the satisfaction of
Allah (SWTA) through obeying the Shari’ah. This is because Muslim
believes in oneness of Allah, who is Almighty and All-powerful in
haven and earth and He created man just for His servitude and
following Him (Al-Qur’an, 51:56). So, it is required to know and abide
by the ‘Halals’ (Allowed) and ‘Harams’ (Forbidden) in Islam. Interest-
based traditional accounting do not reveal appropriate value of assets
in the Balance Sheet for determining accurate amount of Zakat, the
compulsory yearly payment by the rich to the poor. Undue cost
controlling and cost reduction techniques in traditional accounting
sometimes lead to unjust and inhuman behavior to the employees of
the organization, which is forbidden (Haram) in Islam (Shahul-2).
Therefore, to avoid these sorts of accounting practices and to comply
with the principles of Qur’an and Sunnah, it is essential to follow
Islamic accounting in the Muslim world and Islamic organization
replacing current traditional or conventional accounting.
3. Alternative Accounting system for Islamic Organizations:
At present, thousands of various Islamic organizations including
business organizations such as bank, insurance and investment
companies are operating with specific Islamic objectives. But their
use of interest-based traditional accounting in these organizations is
not fully compatible with these Islamic objectives. Islamic accounting
will be more appropriate to achieve the socio-economic and religious
objectives of Islamic institutions and Muslim users (Shahul,2001).
4. Contradiction between Traditional Accounting and Islamic
Principles:
The basis of Islamic accounting is profit while the basis of traditional
accounting is interest which is completely ‘Haram’ (forbidden) in
Islam (Al-Qur’an, 2:278 & 2:279). Like interest, the futures and options,
short sale, preferred stock, interest-based modern investment modes
related transactions are also practiced in traditional accounting
which is in sharp contrasts with the Islamic principles (Shahul-2).
Traditional accounting is also unable to avoid and control
misappropriation of wealth and power and also unsocial behavior of
the dominating businessmen or companies (Gray et. al, 1988). Hence,
to avoid these undesirable activities and transactions accounting
conceptions on the principles of Islamic Shari’ah through Islamic
accounting is a must.
5. Islamization of knowledge:
Islam, a way of life directed by Allah (SWT), is compatible with the
nature of the people and also a source of happiness in this earth and
also hereafter (Al-Qur’an, 2:201). After experiencing the difficulties
and sufferings of capitalism, socialism and communism, the people
are now returning to their natural way of life through Islam (Shahul-
2). To accomplish all the activities (including social, political, cultural,
legal and educational activities, etc.) in the way of Islam, it is now
required to redefine, restructure the available knowledge and also
develop new knowledge based on Islamic norms and principles. At
present there is movement towards Islamization of knowledge and
disciplines (IIIT, 1988). Therefore, accounting is also necessary to be
developed based on Islamic principles for implementing justice to all,
for equitable distribution of wealth and providing accurate
information to the people in the society (Al-Qur’an,4:122).
Accounting Concepts-Islamic Perspective:
The basis of Islamic Accounting is acceptance of the postulates of
Tawhid (Oneness and Unity of God-As Islam is a code/way of life
given by Allah SWT), Adl (Maintenance of Justice for all), Ihsan
(Goodness/ Kindness to all concerned parties),Amanah (Maintenance
of Honesty in all aspects), Tawakkal (Trust in God in doing all
activities), Infaq (Spending to meet social obligations/
responsibilities), Sabr (Maintenance of Patience), Istislah
(Maintenance of Public Interest), and avoidance of the Riba
(Avoidance of Interest), Ihtikaar (Avoidance of Hoarding), Zulm
(Avoidance of Tyranny), Hirs (Avoidance of Greed), Israf (Avoidance of
Extravagance) (Lewis, 2006). Keeping in view these postulates of
Islamic accounting, the authors, in the following paras, endeavour to
analyze the existing concepts of traditional accounting in the
perspective Islamic accounting.
1. Entity Concept:
The entity concept states that the firm and its owners are separate
entities and one firm is separate from another firm. Therefore, the
owners (in some cases) are not liable for the liabilities of the firms.
Hence, Islamic Shari’ah disagrees with the concept because the
owners are not liable for the company’s debt at the time of
bankruptcy but have the rights to residual profits which is unlawful
and similar to gambling (Napier, 2007). Some others accepted the
concept as at the early age of Islamic State there were Mosques or
Baitul-Mal with separate financial status and (Abdul-Rahman, 1996
and AAOIFI, 1999). However, in Islamic accounting, if the owners
become bankrupt, then the liabilities may be distributed to their
successors or legal inheritors, and, it will be better for the owners
because he will be asked for it in hereafter (Al-Qur’an, 23:115). As per
the survey result, 85% of the respondents agreed to accept the entity
concept as a concept of Islamic accounting and 10% of the
respondents disagreed in this regard (See Appendix-2). Hence, entity
concept may be taken as a concept of Islamic accounting.
2.Going Concern Concept:
According to this concept it is assumed that the business will
continue for indefinite period of time and therefore the accountants
show acquisition of any fixed assets as cost but not as the expense of
that period. In Islamic view, only the Allah will exist indefinitely, so it
cannot be accepted in Islamic accounting. It is possible to avoid this
conflict if we say that final and permanent existence is true only for
Allah (SWTA) and a business organization will continue indefinitely (if
Allah wishes). We know, Mudaraba contract, which is also for specific
period, but assumed to continue until one or all of the parties
involved decide to terminate the contract (Al-Obji, 1996). Islam
emphasizes the continuity of business activities because they are the
source of Zakat, (to pay Zakat, business must continue) which is paid
every year.As per the survey result,80% of the respondents agreed to
accept the going concern concept as a concept of Islamic accounting
and 20% of the respondents disagreed in this regard (See Appendix-
2). Hence, going concern concept may be accepted as a concept of
Islamic accounting.
3.Accounting Period Concept:
The financial statements representing the financial performance
and financial position of the business are periodically disclosed based
on this concept. In Islamic points of view, this concept may be
accepted based on the ground that Zakat is paid annually and
conditions for applicability of Zakat is holding of assets for one year.
Accounting statements should be prepared for a particular period,
showing the amounts on which Zakat would be levied (Adnan and
Gaffikin, 1997). Attiah (1989) noted that the budget of the Baitul-Mal
was prepared on an annual basis, and the employees in the Islamic
states were paid annually.
4.Money Measurement Concept:
The money measurement concept states that the events recorded in
accounting must be measurable in terms of money and it facilitates
to record the heterogeneous objects to be expressed in a common
denominator. But the objects that cannot be expressed in terms of
money are not recorded and the purchasing power of money is
unstable in inflationary environment and it affects future financial
rights and obligations. Therefore, the role of money as a standard of
measure is questioned by different Islamic scholars. Ahmed (1990)
stated that using money as a unit of measurement is questionable
from Islamic perspective in an inflationary situation and hence
money is unable to serve as a just and honest unit of account. But
most of the scholars argued that because of unavailability of any
suitable standard money can be taken as a standard of expressing
diverse objects in a common denominator (Napier, 2007). In an
interest-free economy money may be used in recording transactions
without any question. Islamic accounting records and prepares
reports relating to some transactions which may not be possible to
measure in terms of money (for example, environmental damages/
degradation by the firm). As per the survey result, 85% of the
respondents agreed to accept the money measurement concept as a
concept of Islamic accounting and 15% of the respondents disagreed
in this respect (See Appendix-2). Hence, money measurement
concept may also be taken as a concept of Islamic accounting.
5.Cost Concept:
According to this concept, the assets acquired should be recorded
and stated in the financial statements at its cost because the cost
amount is objective and verifiable. But for the purpose calculation of
Zakat, the assets are required to be recorded at current market value.
This is because the real (just and fair) picture of the organizations
cannot be revealed with these misleading out dated figures.The cost
concept for valuation corrupts the principle of disclosing the truth to
the interested users (Al-Qur’an 2:42). On the other hand, if current
value is used, then profit or dividend may be distributed among the
stockholders before it is earned, that cannot be approved under
Islamic system of accounting. As current value also creates some
problems and because of non-availability of alternative way and
therefore, this concept can be used in Islamic Accounting practices.
Mirza and Baydoun (2000) suggest using both the valuation methods
in Islamic Accounting, i.e., the contractual transactions with other
parties should be based on cost and Zakat calculation (assets
Valuation) should be based on current market value. Attiah (1989)
stated that major four schools of Islamic thought agree upon this
concept. As per our survey result, 70% of the respondents agreed to
accept the cost concept as a concept of Islamic accounting but 30%
of the respondents disagreed in this regard (See Appendix-2). Hence,
the scholars should think over the matter.
6. Conservatism Concept:
The basis of the concept is“Anticipate for no profit but provide for all
possible losses.”It states that if the accountant has reasonable choice,
accountant records assets and revenues at lower figures and
liabilities and expenses at higher figures. It acts as a constraint to the
presentation of relevant and reliable data (Belkaoui, 2000). This
concept contradicts with Qur’an and Sunnah because it would lead
to understatement of assets which is the basis of Zakat calculation.
Ahmed (1990) stated that though this concept contradicts with
Islamic Principles but it restricts overoptimistic valuations and
distribution of unearned profit. Allah (SWTA) also asks Muslims to
choose and follow medium paths avoiding the extremes (Al-Qur’an,
25:67 & 17:29). Therefore, justified market value (the current value of
the largest trading market or average values of the larger
can be taken into account for accounting records. As per the survey
result, 70% of the respondents agreed to accept the conservatism
concept as a concept of Islamic accounting but 25% of the
respondents disagreed in this regard (See Appendix-2). Hence, the
scholars should think over the matter.
7. Full Disclosure Concept:
The main purpose of accounting is to provide necessary information
to the interested users for making decisions. According to this
concept, all the information relating to the organization should be
disclosed fairly and completely in the financial statements so that the
intended users can understand the statements without any
clarification from the accountants. So, traditional accounting
emphasizes on users requirement of information while Islamic
accounting emphasizes on accountability of the accountants in
disclosing the information. Islam also gives emphasis on ethical
disclosure as the accountability to the nation, because Allah (SWTA)
knows every thing what we conceal and disclose (Al Qur’an, 14:38). --
And nothing is hidden from your lord (so much as) the weight of an
atom (or small ant) on the earth or in the heaven (Al-Qur’an 10:61).
Not what is less than that or what is greater than that but is written in
a clear record. (Al-Qur’an 18:49)---They will say:“Woe to us! What sort
of Book is this that leaves neither a small thing nor a big thing, but
has recorded it with numbers!”-- And they will find all that they did,
placed before them, and your lord treats no one with injustice. Allah
said (Al-Qur’an 2:42):“Do not cover the truth with falsehood and do
not conceal truth when you know it.” Hence, this concept is fully
compatible with the Islamic Shari’ah.
8. Materiality Concept:
The accountant does not attempt to record a great many events
which are so insignificant that recording of them in books is no at all
justified by the usefulness of the result (Khan, 1995). In some cases it
may be impossible to understand and present the statements in a
convenient way if all the information is incorporated therein. But
Islam always emphasizes on justice, and it may not be possible to
maintain justice in presenting information if materiality concept is
applied. The word ‘material’ is a relative term and varies person to
person and organization to organization. For maintaining justice
Allah (SWTA) always emphasizes on full recording and disclosure (Al-
Qur’an, 99:7-8 and 50:18). In Islamic accounting, (where possible and
easier) full disclosure of information is preferable, and (where not
possible to present fully) materiality concept can be used if there is
available safeguards against misuse or if accountants’ committee
furnish a qualitative guidelines on the concept of materiality to arrive
at the uniform practice (Islam, 2000). As per the survey result, 75% of
the respondents agreed to accept the materiality concept as a
concept of Islamic accounting,10% of the respondents disagreed and
10% of the respondents were indifferent in this regard (See
Appendix-2).Hence,materiality concept may be taken as a concept of
Islamic accounting but should be used carefully.
9. Accrual Concept:
As per accrual concept revenues are recognized and recorded in the
books of account when it is generated, but not when it is received in
cash and expenses are recognized and recorded in the books of
account when it is incurred, but not when it is paid in cash (Khan,
1995). But application of this concept requires subjective judgment
which may be biased and created doubts in account. In accrual basis
of accounting, profits may be distributed collecting cash from other
sources before collecting cash from that account which may turn into
bad (Napier, 2007). Since Islam is based on truthfulness and accuracy,
it seems that for Islamic Accounting the cash basis of accounting
rather than the accrual basis of accounting will be more appropriate.
As per the survey result,85% of the respondents agreed to accept the
accrual concept as a concept of Islamic accounting and 15% of the
respondents disagreed in this respect (See Appendix-2). Hence,
Accrual concept’may be taken as a concept of Islamic accounting.
10. Other Concepts:
There are some other concepts of accounting such as Dual Aspect,
Matching, Reliability, Consistency, and Objectivity Concepts which are
followed in recording and presenting the information to the interested
users fairly, truly and appropriately. Though there are some different
opinions regarding the acceptability of some of these concepts in
Islamic accounting but none of these are conflicting with the basic
principles of Islamic Shari’ah. For fair, clear, and appropriate recording
and presentation of the information relating to the operating results
and financial position of the organization, these concepts are
sometimes compulsorily required in Islamic accounting. Therefore,
these concepts may be accepted in practicing Islamic accounting.
9. Differences between Islamic Accounting and Traditional/
Conventional Accounting:
Islamic Accounting and Traditional/Conventional Accounting have
got differences in many points among which the basic ones have
been highlighted in the following table.
Islamic Accounting Systems and Practices:
Islamic accounting does not avoid all methods and techniques
applied in conventional accounting saying illegal but it justifies all
these things through the testing stone of Qur’an and Sunnah.Islamic
accounting accepts a conventional method if it is not conflicting with
the values and principles of Shari’ah and rejects if it conflicts and it
also incorporates some other norms and values not practiced by
conventional accounting for establishment of justice. The basic
principles governing summarization of financial transactions are as
follows (Ahmed, 1994): (a) Interest is prohibited while trade is
permitted (subject to restrictions), (b) Illegal or unjustified
transaction is prohibited,(c) Uncertainty (al-Garer) in trade contract is
not allowed, (d) All transactions must be conducive to welfare of all
concerned. Some aspects of Islamic accounting practices are
enumerated as below:
1.International Accounting Standards (IAS):
Accounting Standards are the norms of accounting policies and
practices issued by the accounting bodies for the guidance of their
members regarding the treatment of items which makes up the
financial statements and the disclosure therein (Hye, 2000). The IAS
which is currently practiced was developed interest-based western
socio-economic culture and environment. But Islamic organizations,
established and operated based on Islamic Shari’ah to achieve a
legitimate objective, work in a different environment using different
financial instruments and perform some transactions which are
unknown to the western world. Hence,The Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) is an Islamic
international autonomous not-for-profit corporate body that was
established in Bahrain to prepare accounting, auditing, governance,
ethics and Shari'ah standards for Islamic financial institutions and the
industry on 26th
February, 1990 to attain the following objectives
(1) to develop accounting and auditing thoughts relevant to Islamic
financial institutions; (2) to disseminate accounting and auditing
thoughts relevant to Islamic financial institutions and its applications
through training, seminars, publication of periodical newsletters,
carrying out and commissioning of research and other means; (3) to
prepare, promulgate and interpret accounting and auditing
standards for Islamic financial institutions; and (4) to review and
amend accounting and auditing standards for Islamic financial
institutions.
2.Accounting Cycle:
The order or sequence in which accounting procedures are
performed is known as Accounting Cycle (Khan, 1995) or it is a
process by which accountants produce an entity’s financial
statements for a specific period of time (Horngren and Harrison,
1992). Accounting cycle is an organized way to reach the destination
of accounting objectives and which basically consists five steps-
Recording (through journal), Classifying (through ledger),
Summarizing (through Trial Balance), Preparation of financial
statements and Interpretation and Analysis of financial statements.In
Islamic accounting this accounting cycle may be applied fully for the
financial transactions only but not for non-financial transactions.
Islamic accounting records and prepares reports relating to some
transactions which may not be possible to measure in terms of
money (for example, environmental damages/ degradation by the
firm) and double entry accounting system may not be appropriately
followed for these types of transactions because the firm generally is
not compensating anything to the community. In interpretation and
analysis the accountants should justify the performance of the
organization calculating new ratios regarding contribution to
employees, and employees’ development, contribution to society
and also to the environment in relation to value added (Mirza and
Baydoun,2000).
3.Preparation of Financial Statements:
Each entity prepares different financial statements as per the
directions of law and of the requirements of the information of the
users of those statements.These financial statements include income
statement, owner’s equity statement, cash flow statement and
balance sheet. But Islamic accounting in addition requires
preparation of:(a) Reports of Funds for Zakat and Their Uses detailing
the sources of funds for Zakat, methods of its collection including
controls to safeguard these funds and their uses; (b) Reports about
prohibited Income & Expenses to disclose income earned from
prohibited transactions or sources and expenditures prohibited by
the Shari’ah and how those earnings were disposed of and also the
causes of these income; (c) Social Responsibility Reports, and Human
Resources Development Reports (AAOIFI 3). Some scholars
recommended preparing value added statement. A value added
statement (Appendix-1) stresses entity performance from a
community viewpoint as opposed to focusing on owners, which is
consistent with the Islamic view that firms are accountable to the
community (Napier, 2007). To represent the accurate financial
position of the firm, Baydoun and Willett (2000) suggested preparing
current value balance sheet at the end of the accounting period.
Fictitious Assets should not be revealed in the balance sheet and for
determining the net realizable receivables, direct method of written-
off should be adopted, that is, revalue the account to determine the
extent of the loss to be specifically provided for (Hamat,1994).
4.Zakat Calculation:
The word Zakat literally means purification. One of the five pillars of
Islam is Zakat. A rich Muslim or a solvent business is compulsorily
required to pay Zakat once a year basically to the poor to diminish
poverty and minimize the financial gap between them. Zakat has
been described as the cornerstone of the financial structure in an
Islamic State (Siddiqi, 1982). Muslim sole proprietors and partners are
obliged to pay Zakat on both personal wealth and on business (Faris,
1966). For payment of Zakat the assets must possess the
characteristics which are (a) Perfect ownership on assets, (b) assets is
growing or productive, (c) assets above the basic requirement or
surplus assets (d) assets owned for a full year.For calculation of Zakat,
valuation of assets should be according to the current market price
or net realizable value. Inventories valuation should not be the lower
amount of cost or market price or there should not be maintained
any allowance for doubtful accounts receivable (Clarke et al.,1996).
5.Dealing with Interest:
Interest is the predetermined fixed charge on borrowing or investing
money but any transactions relating to interest (in any form) is
strictly prohibited by Islamic Shari’ah. Hence, Islamic organizations
(banks) use alternative modes of borrowings/investments to meet
their needs of financing.The alternatives are discussed below:
a) Mudarabah (trust financing): The bank acts as a partner,
providing cash to the borrower and sharing in the net profits and net
losses of the business (Haqiqi & Pomeranz, 1987). The loan is for an
undetermined period, although the contract may be rescinded by
either party. Kahf (1978) defines Mudarabah as: An Islamic
mechanism for introducing monetary assets into production activity
by transforming them into real factors of production as a result of a
joint action between the owner of the assets and the entrepreneur.
As this method, the lender supplies capital to an agent for trading
purposes and the borrower would contribute only his work and
experience. Afterwards, the net profit is divided between the two
parties according to the ratios agreed in advance in the contract. In
case of loss from normal business causes or natural causes, however,
the lender bears all the loss and the borrower receives no reward for
his effort.This is consistent with the prohibition of a fixed return, i.e.,
interest on one's capital.
b) Murabaha (cost-plus trade financing): The bank, as a partner,
provides the finance for purchasing goods for a share of the profit
once the goods are sold.The bank may or may not share in any losses
incurred. Repayment may be either in lump sum or in installments.
The accounting entries for these transactions are: when the bank
buys goods and pays cash;Debit-cost of goods;and Credit-amount in
bankers-check (Cash);When the bank sells the goods to the client on
a deferred payment basis: Debit-Investment (cost-plus-profit), Credit-
Cost of goods (cost) and Credit-Unearned profit (profit margin)
(Hamat,1994a).
c) Musharaka (Participation financing): Musharaka is another
mode of interest-free financing where the bank and the client agree
to join in a temporary partnership to effect a certain operation within
an agreed period of time. Under this mode of financing both parties
contribute to the capital of the operation in varying degrees, and
agree to divide the net profits/losses actually earned in the ratios
agreed upon in advance.
d) Ijara (Rental/lease financing): Ijara may be defined as an
agreement whereby the lessor conveys the right to use a specified
asset to the lessee for an agreed period of time in return of a fair rent.
In Ijara financing bank purchases fixed assets and allows the
clients/businesses to use in return for rental income. There are two
types of lease arrangements; finance lease (A long-time lease where
the lessee gets the ownership of the asset) and operating lease (A
short-time lease where the lessor retains the ownership of the asset).
There is no Shari’ah restriction with regards to income recognition,or
presentation.But, if the profit margin is tied to the interest rate, this is
not permitted as it creates uncertainties. The lessees' total rental
payable or the banks' total rental income varies according to changes
in the rate of return of the bank. In case of finance lease, lease
receivable, less the profit margin which is not received, should be
recorded as fixed assets in the balance sheet, and In the case of
operating lease,the lease,assets should be recorded as fixed assets in
the balance sheet of the lessor and depreciation for these assets is
provided periodically (Hamat,1994b).
6.Islamic Accounting Model:
At this stage Islamic Accounting model is pertained below. The
model indicates that Islamic Accounting works under the peripheries
of Islamic rules and Shari’ah and Islamic society and produces some
differential reports not required in traditional/conventional
accounting.
Policy Implications:
Among others the major policy implications of this research are as
follows:
(a) Muslim owners of business firms and concerns are expected to
have guidelines from this article to report their firm’s financial
recording and reporting under Islamic accounting systems.
(b) The researchers in Islamic Accounting may usefully use the issues
raised in this article for more comprehensive studies in Islamic
Accounting and practices in a Muslim majority country like
Bangladesh.
(c) The Government, for ensuring social welfare and proper Zakat
collection and distribution, may practice Islamic Accounting as
enunciated in this article.
Conclusion:
So far a modest attempt has been made to reveal the objectives,
nature and need of Islamic Accounting contrasting it with the
traditional or conventional accounting. The issues raised on
principles and practices of Islamic Accounting here will work as
stepping stones for further research and analysis in this emerging
and essential field of knowledge for the Muslim owners and
proprietors of profit and not-for-profit organizations. r
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Web Address:
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(2) Shahul,H.--The Need for Fundamental Research in Islamic Accounting,
http://www.iiu.edu.my/iaw/Articles.
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1.The concepts of Traditional Accounting and Islamic Accounting are not same:
Coding Frequency Percent Mean
+3 12 15
+2 44 55
+1 24 30
0 0 - +1.85
-1 0 -
-2 0 -
-3 0 -
Total 80 100
2.It is necessary to have a separate Accounting system for Islamic organizations:
Coding Frequency Percent Mean
+3 40 50
+2 24 30
+1 8 10
0 0 - +2.05
-1 4 05
-2 4 05
-3 0 -
Total 80 100
3.‘Entity Concept’may be taken as a concept of Islamic Accounting:
Coding Frequency Percent Mean
+3 28 35
+2 24 30
+1 16 20
0 4 05
-1 0 - +1.55
-2 0 -
-3 8 10
Total 80 100
4.‘Going Concern Concept’may be taken as a concept of Islamic Accounting.
Coding Frequency Percent Mean
+3 12 15
+2 40 50
+1 12 15
0 0 - +1.20
-1 8 10
-2 0 -
-3 8 10
Total 80 100
5.‘Cost Concept’may be taken as a concept of Islamic Accounting.
Coding Frequency Percent Mean
+3 16 20
+2 36 45
+1 4 05
0 0 - +1.00
-1 4 05
-2 20 25
-3 0 -
Total 80 100
6.‘Conservatism concept’may be taken as a concept of Islamic Accounting.
Coding Frequency Percent Mean
+3 28 35
+2 16 20
+1 12 15
0 4 05
-1 4 05
- 2 8 10
- 3 8 10
Total 80 100
Points Islamic Accounting Traditional Accounting
1.Definition 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.
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.(Without any
compliance to Islamic
Shari’ah.)
2.Operations In operational,it
performs everything
within the limits of
Islamic Shari’ah.
In operational,it allows
everything to achieve
maximum profit.
3.Nature t is conceptualized
based on the Islamic
principles.
It is conceptualized based on
principles of secularism and
capitalism.
4.Governance It is governed by Al-
Qur’an and Sunnah or
Islamic Shari’ah.
It is govern by Accounting
and commercial law and
Secular Ethics.
6.Orientation It is always society or
community oriented.
It is always firm or individual
oriented.
5.Normative or DescriptiveThere is no
difference between
Normative and
Descriptive accounting.
There is difference between
normative accounting
descriptive accounting.
Points Islamic Accounting Traditional Accounting
7.Basis Unity of God (Allah).
(Tawhidism)
Economic rationalism.
8.Entity
Concept
Firm does not have
separate financial
obligation.
Firm and Owner have
separate entity and financial
obligation.
9.Cost or Price Market or Selling price
rather than Historical
cost is preferred.
Historical cost rather than
Market price is preferred.
10.Disclosure Full disclosure to satisfy
any reasonable demand
for information in
accordance with the
Shari’ah.
Limited disclosure provision
of information subject to
public interest.
14.Unit of
Measurement
Quantity based and
monetary based (Zakat
calculation).
Monetary value based.
14.Accounting
Period
One lunar year for Zakat
calculation.
Periodical measurement of
performance.
16.Equity Recognize each party
equally.
Survival of the fittest.
17.Profit Determine
accurate and
reasonable profit.
Tries to maximize profit.
18.Ownership It recognizes relative
ownership on assets
It recognizes absolute
ownership on assets and
firm.
19.Reports Reports socio-economic
and religious events
and transactions.
Reports only economic
events and transactions.
15.Accounta-
bility
Public accountability
focusing on the
community who
participate in exploiting
resources.
Personal accountability
focusing on individuals who
control resources.
13.Conservatism Most favorable to
society (justice).
Most favorable impact on
owners and least favorable to
society.
12.Consistency Consistency based on
Shari’ah.
Consistency based on GAAP.
11.Going
Concern
Business continues not
forever but depends on
contractual agreement
between parties.
Business continues forever or
unlimited period of time.
Source:Developed through literature review and research.
The Rules of Islamic Shari’ah
Islamic Suciety
Firms/Organizations
Contracts/Transactions
Accounting and Reporting Standards
Accounting Policies
Accounting Cycle
Recording Classifying Summarizing Preparation of Interpretation
(Journal) (Ledger) (Trial Balance) Financial Statements and Analysis
a) Income Statement/Value Added Statement
b) Owners’ Equity Statement
c) Balance Sheet
d) Cash flow Statement
e) Reports of Funds for Zakat and Their Uses
f) Reports about prohibited Income & Expenses
g) Social Responsibility Reports
h) Human Resources Development Reports
Figure-1:Modified from Mirza and Baydoun (2000).
Appendix-1
Conventional Income Statement versus Value Added Statement (Shahul and Yaya, 2003).
Conventional Income Statement Amount Value Added Statement Amount
Sales Revenue……………………
Less: Material used…….. 200,000
Wages……………...400,000
Services purchase….600,000
Interest……...……..120,000
Depreciation……….. 80,000
Profit before tax………………...
Less: Income tax (Assume 20%)...
Profit after tax ………………….
Less: Dividend payable………….
Retained earning for the year.....
2,000,000
1,400,000
600,000
120,000
480,000
200,000
280,000
Sales Revenue………….………..
Less: Bought in materials 200,000
Services purchase...600,000
Depreciation ….…...80,000
Value Added to distribute……….
Distributions:
To employees …………………
To capital providers:
Interests……….120,000
Dividends……. 200,000
To Government………………..
Retained earnings..…………….
2,000,000
880,000
1,120,000
400,000
320,000
120,000
280,000
1,120,000
As per the organization, the position of the respondents is given below:
Explanation University of Chittagong IIUC Islamic Banks Others Total
No. of Respondents 24 28 16 12 80
Percentage 30 35 20 15 100
Appendix-2
Questionnaire of Opinion Survey
Findings and Analysis
A study has been conducted on the experts in accounting to justify
their opinion regarding the acceptance of principles of Islamic
accounting. The educational qualifications of the respondents are
100% Masters in Business Studies and all of the respondents are
Muslim. As per their profession, the position of the respondents is
given below:
To make the analysis easier, Coding has been taken as: +3 = Strongly Agree; +2 = Agree; +1 = Some What Agree; 0 = No Response; -1 = Some
What Disagree;-2 = Disagree;-3 = Strongly Disagree.The result and analysis of the survey is stated below:
Explanation University
Teachers
High level
Executives
Mid - level
Executives
Junior
Officials
Total
No. of Respondents 28 24 20 08 80
Percentage 35 30 25 10 100
7. ‘Materiality concept’may be taken as a concept of Islamic Accounting.
Coding Frequency Percent Mean
+3 16 20
+2 40 50
+1 4 05
0 12 15 +1.50
-1 4 05
-2 4 05
-3 0 -
Total 80 100
8. ‘Money Measurement concept’may be taken as a concept of Islamic Accounting.
Coding Frequency Percent Mean
+3 16 20
+2 52 65
+1 0 -
0 0 - +1.70
-1 8 10
-2 4 05
-3 0 -
Total 80 100
9. Accrual concept’may be taken as a concept of Islamic Accounting.
CodingFrequency Percent Mean
+3 12 15
+2 44 55
+1 12 15
0 0 - +1.40
-1 4 05
-2 4 05
-3 4 05
Total 80 100
10. Do you think that there would be any problem(s) in implementing
Islamic accounting in your organization? If yes, Please mention the
problems below.
11. What accounting principles & practices do you observe now to be
contradictory to Islamic Shari’ah? Please mention, if any.