Additional slides on

Islamic Accounting

Semester 2, 2020/2021
 Introduction
• Two major issues pertaining to Islamic
accounting:
Accounting and culture
Conventional and non-conventional accounting

• Two major accounting disciplines that can be

considered as non-conventional:
Islamic accounting
Social and environmental accounting
 Accounting and Culture
 Culture (i.e. religion as a way of life) influences
accounting (Hofstede, 1983, Gray, 1998)

 Culture: “all those social, political, and other factors

which influence individual’s behavior” (Hamid, et. al,
1993)

 Different culture, different economic-social-politic

systems demand different accounting system. i.e
Shinto based Accounting.

 Islam is different from Occident (Capitalist ideology),

so it must have its own accounting system (Gambling
What is Islamic accounting?
• 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’a
(law) and delivering on its socio economic
objectives.
 Quranic verse on Accounting
• i.e. Al - baqarah (Al Quran chapter 2) verse 282:

• “Oh you who believe! When you deal with each

other, in transaction involving future obligations in
a fixed period of time, reduce them in writing. Let
a scribe write down faithfully as between parties”.

• There is an integration between worship

ritual and socio-economy-politico and daily life of
mankind.
 Basis of Islamic accounting
• Islam as a religion (way of life/culture)
• Islamic values
• Islamic economic

Islamic point of view – economics, politics, religion and

social affairs fall under shariah (Islamic law).
Muslims believe in the hereafter
Islamic economics is built on the shariah paradigm and
includes accounting.
In an Islamic society, the muslim man/woman is the
representative agent of the Islamic economic system, not
the economic man or woman as perceived by capitalism
Continue – Basis of Islamic accounting….
• If the information produced is useful and appropriate to
make economic or social decisions through a moral
framework, then the users will act in ways to correct their
‘sins’ and increase good behavior leading to God’s
pleasure in the hereafter.

• If the accounting information system misinforms or does

not provide appropriate information, the business might
be undertaking sinful activities, the responsibility for
which will be borne by the investor as he is a participant.
This may lead him to Hell.
 Factors behind the development Islamic
accounting records & reports in Muslim civilization

 Zakat

 Baitulmal, Waqf
 Geographical expansion
 Religiously motivated
 The features of accounting practice

Based on shariah/Islamic ethics &

Islamic economy
Accountability to God (Allah) and
society- Full disclosure

Support socia-justice
 The worldview behind the theory and
practice of conventional accounting.

as well asillum
 Theory
 Based on ethical value concept
 Secularism
 Emphasis on reasoning as well as
illumination of rationality
Continue….
In Practice
 Western world view and form the basis of accounting
system
 Relies on ethical value concepts and rational
economic foundation
 Focus on rational economic decision model
 Accountability to primary users
 Limited disclosure
 Support / enhance capitalism
Difference characteristics of Islamic accounting
information and conventional accounting
 Islamic Conventional

System Syariah regulations Conventional

regulations
Relevance Truth, fair and accurate Influence economic decision
disclosure of all facts Timeliness
Understandability Information not to deceive user Information in understandable
form

Materiality Disclosure of all necessary Information that would have

Information
impact on economic decision

Reliability True and complete, reliable and Verifiability,

financial disclosure for them faithful representation,
substance over form, neutrality,
prudence and completeness

Faithful Presented correctly and fully Must represent fully all

presentation including details for all transactions it purports to
transactions undertaken represent
Conventional Vs Islamic Accounting

Conventional Islamic Accounting:

Accounting: • Based upon law
• Based upon modern originating in the Qur’an
commercial law- (Islamic law, As-Sunnah)
permissive rather than • Full disclosure (to satisfy
ethical any reasonable demand
• Limited disclosure for information in
(provision of information accordance with the
subject to public Shari’a)
interest) • Public accountability
• Personal accountability (focus on the community
(focus on individuals who participate in
who control resources) exploiting resources)
 Difference between conventional and Islamic
reporting perspective
ISSUE CONVENTIONAL ISLAMIC

Objectives Accountability to • Accountability to God

stakeholders • Accountability to
society
Assist users in their • Assist users in their
economic and economic
investment decision and investment decision
and accomplishing of
their religious obligations
(zakat)

Measurement Historical cost, lower of • Historical cost

cost and NRV • Current value
Continue…
ISSUE CONVENTIONAL ISLAMIC
Reports • Balance Sheet •Balance Sheet
• Income Statement •Income Statement
• Cash Flow •Cash Flow Statement
Statement •Environmental
• Environmental •Social Report
• Social Report •Value Added Statement
•Current Value B/S
•Statement of sources
and uses of zakat funds
Continue…
ISSUE CONVENTIONAL ISLAMIC

Disclosure • Limited disclosure Full disclosure

• Economic • Economic issues
• Environmental • Environment
• Social such as • Social issues-
employee-related, monopoly practices
products, community -interest/riba
development -corrupt practice
-non-fulfillment
of contract
-amount of zakat paid
-computation of zakat
-designated company
 Conventional vs. Islamic Accounting:
(Baydoun and Willet, Islamic Corporate Reports, Abacus, Vol.
36, No.1, 2000).
Conventional Acc.
Islamic Acct.
• Economic rationalism
• Secular
• Unity of God
• Individualistic • Religious
• Profit maximization • Communal
• Survival of fittest • Reasonable profit
• Process • Equity
• Absolute ownership
• (Ec. rationalism: the desire to • Environment
stand apart from others, to
compete, to manipulate and to
• Relative ownership
amass surplus”)
 Difference of Islamic Accounting in the
context of objectives, measurement
and disclosure and presentation
of information.

Rizal Yaya & Shahul Hameed (2006)

 Decision usefulness
 Stewardship
 Islamic Accountability
 Decision usefulness
 provide information that is useful in making
business and economic decision.
 information about Islamic bank’s compliance
• with the Islamic syariah
 information about financial position and
performance
 cash flow information-information to assist the
concerned party in determination of zakat
 social and environmental information
 Stewardship
• Contribute to the safeguarding of the
assets, and to the enhancement of
the managerial and productive
capabilities of Islamic bank,
encouraging compliance with its
established goal and policies.
 Islamic Accountability

Premised on both the accounter & the accountee

having dual accountabilities-arise from concept
khalifah (Al-Abd – Slaves);

Accountable to Allah on the day of judgment for all

resources under their control, how it is used-
contract between an owner & a manager, social
contract between firm & society.

• Conventional-
accountable and provide useful information mainly
to shareholders, lenders & creditors.
 Measurement
 Zakat as a cornerstone of determining
measurements tools-concept in Islam deals
with specifically with measurement
of assets,-
 one of the 5 pillars of Islam,-development
of accounting in early Muslim government
 Based on the selling price prevailing at the
time zakat fall due
 Apply current cost not HC
 Who are the financial information users?

• Islamic accounting may require a different statement

altogether to deemphasize the focus on profits by the
income statement provided by conventional accounting.

• Baydoun and Willlet (2000) have suggested a Value Added

Statement to replace the Income Statement in Islamic
Corporate Reports.

• They argue that this shows and encourages a cooperative

environment in business as opposed to a destructive
competitive environment.
 Disclosure & Presentation of Information

 Economic performance / financial statements

 Social responsibilities information
 Zakat information
 Any prohibited transaction
 Non-fulfillment of contract
 Value added statement
 Shortcoming of conventional historical
cost accounting from Islamic perspective.
 Historical cost has no shariah basis to applied in
an Islamic perspective,
 The contract fulfillment principle cannot be
used
 Use current value measurement (CVM)
 disclose the truth as it is
 HC would lead to the understated valuation
Continue - shortcoming
Externalities is not included in financial report
(Environmental accounting).
 Intangible asset cannot be measured adequately.
 Human resources and employee reporting interest are
not included.
Social Interest is overlooked.
Promote the exploitation of capitalist over labor and
society.
Promote the concentration of wealth and power to the
hand of the rich.
 Summary
• Read the following article (uploaded):
Mervyn K Lewis, “Islam and Accounting” (Accounting Forum, Volume
25, Issue 2, June 2001)
El-Tegani Abdul Gader Ahmed , “ Accounting Postulates and Principles
from An Islamic Perspective” (Review of Islamic Economics, 1994)
Self-answered questions:
1. What are the differences between conventional accounting and Islamic
accounting?
2. What are the basis of Islamic accounting?
•3. The importance of the following concept :
• - Realization of fairness and justice
• - Preservation of the rights and due of all parties
• - Paying zakat (that necessitates having accurate and just financial
statements which represent accurately and truly financial position of the
entity)