beginners for Islamic accounting

1. Topic 1
Basis of Islamic Accounting Theory
Presenting by:
Khalid Abdi Nur (barbarawi), Senior lecturer
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2. Contents
 Introduction
 Accounting and Its Environment
 Accounting objectives
 Accounting and Auditing Organization for Islamic
Financial Institutions(AAOIFI)
 Conventional Vs. Islamic Accounting
 Conclusion.

3. Introduction
 Accounting is “the language of business.” The better you
understand the language, the better your decisions will be,
and the better you can manage your finances.
 For example,
 how will you decide to borrow money? You had better
consider your income: The concept of income comes
straight from accounting.
 Accounting is the information system that measures
business activity, processes that information into
reports, and communicates the results to decision
makers.
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4. Cont..
 A key product of accounting is a set of documents
called financial statements.
 Financial statements are documents that report on
an individual’s or organization’s business in monetary
terms.
 The accounting process relies on bookkeeping in the
form of double entry system.
 Bookkeeping is a technical element of accounting as
calculation is a technical element of mathematics.
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5. Accounting and Its Environment
Definition and Purpose of Accounting
In 1966 the American Accounting Association defined
accounting as:
“…the process of identifying, measuring and
communicating economic information to permit
informed judgments and decisions by users of that
information”
In 1975 they added that the purpose of the process was:
“…to provide information which is potentially useful
for making economic decisions and which, if
provided, will enhance social welfare”
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6. NATURE OF ACCOUNTING PROCESS
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A PROCESS OF
Measuring,
Analyzing,
Understanding Result
of Operation
Recognizing,
recording,
classifying
and summarizing
business
transaction
Reporting &
Presenting
Financial Position
Documents
Vouchers
Ledger
Trial Balance
Report (Mgmt)
Profitability
= Income - Expenses
Growth
Liquidity
Productivity
Financial Statement
• Balance Sheet
• Income Statement
• Cash Flow Statement
STAKEHOLDERS
1. Management
2. Board of Directors
3. Shareholders
4. Investors
5. Creditors
6. Authorities – Inland
Revenue, Baitulmal
7. Staff
8. Public

7. Accounting and Its Environment
Objectives of Financial Accounting and Reporting
 Provide information that is useful to present and potential
investors and creditors and other users in making rational
decisions
 Information should be comprehensible to those who have
reasonable understanding of economic activities and are willing
to study the information
 Accountability framework - the objective is to provide a fair
system of information flow between the agent and the
Principal.
 Primary user groups are shareholders, investors and creditors
 Secondary user groups are employees, customers, and the
public
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8. Accounting and Its Environment
 Accounting can be divided into two fields –
 Financial accounting and
 Management accounting.
 Financial and management accounting are both important
tools for a business, but serve different purposes.
 A business uses accounting to
 determine operational plans in the future,
 review past performance and
 check current business functions.
 Management and financial accounting have different
audiences, as investors are not usually involved in the
day-to-day operations of the business but are concerned
about their investment, whereas managers need
information quickly to make daily business decisions. 8

9. Accounting and Its Environment
Financial accounting provides information for
people outside the company. Lenders and outside
investors are not part of the day-to-day management.
These people use the company’s financial statements.
Management accounting, on the other hand,
generates confidential information for internal
decision makers, such as top executives, department
heads etc.
This internal accounting information will be used to
make decision such as to invest, to buy or sell assets,
to cut spending etc.
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10. Accounting standard- worldwide
 Accounting standards are codified rules and guidelines
of accounting principles and practices for various types
of business transactions and issues.
 Most countries, like Malaysia have their own national
standards to comply with.
 Their national standards usually comply with the
standards issued by the International Accounting
Standards Committee (IASC).
 IASC consists of representatives from accounting
bodies from all over the world.
 Before 2001, the standards issued by IASC were called
International Accounting Standards (IASs).
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11. Cont..
 Now these standards are known as International
Financial Reporting Standards (IFRS).
 In addition, International Accounting Standards
Board (IASB) is solely responsible for developing and
issuing new international standards.
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12. Malaysian Financial Reporting Standards
(MFRSs)-MASB
 In Malaysia, standards issued by MASB were referred
to as MASB standard 1 etc.
 For example MASB 1 is Presentation of Financial
Statements. However from January 2005 all standards
issued by MASB are called Financial Reporting
Standards (FRS) to be in line with the IASs.
 Now MASB 1 is renamed to MASB FRS 101.
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13. What is Islamic Accounting?
 Islamic accounting can be defined as the “accounting
process” which provides suitable information to
stakeholders of an entity which will enable them.
 To ensure that the entity is continuously operating within
the bounds of the Islamic Shari’a and delivering on its
socio-economic objectives.
 Islamic accounting is also a tool, which enables Muslims to
evaluate their own accountabilities to Allah (in respect of
inter-human/environmental transactions).
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14. Objectives of Islamic accounting
 Conventional accounting concentrates on identifying
economic events and transactions
 Islamic accounting must identify socio-economic
and religious events, and transactions
 Fulfil the ultimate accountability to Allah
 Ensure fair and just financial transaction between
human beings
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15. Introduction to AAOIFI
 AAOIFI was established in 1991 in under an Agreement
of Association between a number of Islamic financial
institutions (IFIs). Now it is based in Bahrain.
 Its objectives primarily include development of
accounting, auditing, governance and Shariah
standards for Islamic financial institutions.
 Accounting, Auditing and Governance Standards
(AAGS) are issued by AAOIFI’s Accounting and
Auditing Standards Board whereas the Shariah
Standards Board issues the Shariah Standards.
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16. Accounting and Auditing Organization for
Islamic Financial Institutions(AAOIFI)
• AAOIFI is responsible for formulation and issuance of
international Islamic finance standards.
• AAOIFI has issued 88 standards:
- 26 accounting standards,
- 5 auditing standards,
- 7 governance standards (incl. on Shari’a supervision),
- 2 codes of ethics, and
- 48 Shari’a standards (rules for application of Shari’a).
• In addition, AAOIFI is developing a number of new
standards and reviewing existing standards
• AAOIFI, based in Bahrain, is supported by over 200
institutional members from over 45 countries.
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17. AAOIFI Standards Objectives
1. To develop accounting standards for Islamic financial
institutions as coordination of accounting practices
2. To facilitates the needs of the users of accounting
information of Islamic financial institutions
3. To improve the quality and uniformity of accounting
and auditing practices relating to Islamic financial
institutions through the preparation and issuance of
accounting and auditing standard.
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18. AAOIFI’s objectives of financial accounting
 To determine rights and obligations of all interested
parties.
 To contribute to the safeguarding of the Islamic bank’s
assets.
 To contribute to the enhancement of the managerial and
productive capabilities of the Islamic bank and encourage
compliance with Shari’a laws.
 To provide, through financial reports, useful information
to users of these reports, to enable them to make legitimate
decisions in their dealings with Islamic banks.
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19. Features of Islamic Accounting
1. No different in terms of recording (double entry system)
2. Clear dissimilarity of Accounting Objectives i.e. religious
obligation vs. commercial obligation (different significance
of financial statements)
3. Different users information need (legitimate and equitable
transactions and wealth vs. maximization of wealth and
economic consequences)
4. Compliance with the principles and rules of Shari’ah
5. Different Islamic contractual relationships (mudarabah
instrument; murabahah etc.)
6. Distinct accountability relationships (to Allah SWT and
Ummah)
7. Determination of zakat
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20. Conventional Vs Islamic Accounting
Conventional Accounting:
 Based upon modern
commercial law-permissive
rather than ethical
 Limited disclosure
(provision of information
subject to public interest)
 Personal accountability
(focus on individuals who
control resources)
Islamic Accounting:
 Based upon ethical law
originating in the Qur’an
(Islamic law, As-Sunnah)
 Full disclosure (to satisfy
any reasonable demand for
information in accordance
with the Shari’a)
 Public accountability
(focus on the community
who participate in
exploiting resources)
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21. End!
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