ISLAMIC ACCOUNTING

Chapter 2
Recording transactions
Bashir A.S. Hared
1
 Accounting Concepts
 Usually accounting deals with three
functions:
• Recognition
• Measurement
• Presentation/disclosure
 The elements of financial statements
are:
• Assets, liabilities, revenue, expenses &
equity.

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 Accounting Concepts
 Recognition is to test whether the
elements of financial statements has
taken place.
• Recognition deals with timing of the
financial events.
 Measurement is the amount at
which the element is to be recorded.
 Presentation is how the financial
event or transaction is disclosed in
the financial statements.
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 Assumptions, principles, concepts and
practices
 The basic assumption to be applied for

preparing and presentation of financial

statements:
• Entity concept
• Periodicity (time period concept)
• Cost Principle
• Matching Concept
• Profit recognition
• Conservatism,
• Going concern,
• Disclosure 4
 Assumptions, principles, concepts
and practices
Entity Concept
 Treat organization as a separate entity

from its owners,

Time Period Concept (AAOIFI adopted)
• Periodic reports of financial positions as of a
given date, and divided into reporting
periods
• Accounting for zakat based on “haul” (one
year complete ownership),
Cost Principle
• All transactions are recorded at their actual
(historical) costs, 5
 Assumptions, principles, concepts
and practices
Cost Principle (cont…)
 It is accurate, objective, & reliable,
 However, for zakat computation, Cost
Principle is not relevant,
 Market price is compulsory for zakat
payment,
Matching Concept (AAOIFI adopted)
 Expense items are matched against the
revenue items that they generate.
 Helps zakat calculation, 6
 Assumptions, principles, concepts
and practices
Profit Recognition
 Cash basis vs. accrual basis issue,

 Accrual basis was recommended by

Islamic bodies,
Conservativism
 Accountants should avoid anticipating
profit, but should ensure anticipated
losses and expenses,
 AAOIFI was silent from this concept,

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 Assumptions, principles, concepts
and practices
Going concern
 The business has no intention to
liquidate or cease its operation,
 Accountant can make estimations
over several accounting periods,

Full disclosure
 All substance information for users
shall be disclosed for better decision
making,
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 Assumptions, principles, concepts
and practices
Market Value
 The use of current (market) value
instead of cost principle,
• Provide correct & accurate information for
zakat calculation,
 Market value is required for
maintenance of the initial capital value,
 According to 2:42, information
completeness, accuracy, and disclosure
is an obligation “and cover not truth
with falsehood, nor conceal the truth
while you (what it is)” 9
Transactions & Accounting Equation

 Skimming of:
• Accounting equation summary p. 28
• Chart of accounts p. 53
• Financial statements p. 56

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Chapter End