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Overview of Islamic Accounting

Islamic accounting refers to accounting practices consistent with Sharia (Islamic law). It is based on Quranic principles like prohibitions of riba (interest) and ensures wealth benefits the community through practices like zakat. Historically, accounting originated in the Muslim world and principles like record-keeping date back to the early Islamic state. However, Islamic accounting applies these practices guided by Islamic ethics of being community-oriented and promoting social welfare over individual profit. Stakeholders of Islamic accounting information include not only investors and creditors but the broader society, as businesses have greater accountability under Islamic principles. Core services include financial, management, and Sharia auditing to ensure compliance.

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84 views

Overview of Islamic Accounting

Islamic accounting refers to accounting practices consistent with Sharia (Islamic law). It is based on Quranic principles like prohibitions of riba (interest) and ensures wealth benefits the community through practices like zakat. Historically, accounting originated in the Muslim world and principles like record-keeping date back to the early Islamic state. However, Islamic accounting applies these practices guided by Islamic ethics of being community-oriented and promoting social welfare over individual profit. Stakeholders of Islamic accounting information include not only investors and creditors but the broader society, as businesses have greater accountability under Islamic principles. Core services include financial, management, and Sharia auditing to ensure compliance.

Uploaded by

Novi Wulandari
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ISLAMIC

ACCOUNTING:
AN OVERVIEW
PREPARED BY HENDRI SETYAWAN
LEARNING OBJECTIVES
THE TERM “ISLAMIC ACCOUNTING”

 What does the term refers to?


 “Islamic Accounting” refers to ideas and practices in Muslim-majority
countries in past periods => historically – oriented sense
 “Islamic Accounting” refers to accounting and reporting as practiced
by “Islamic” entities => practice – oriented sense
 “Islamic Accounting” refers to fundamental accounting concepts and
methods that form a coherent body of ideas and practices based on
the religion of Islam => religious / principle - oriented sense
ISLAM the Deen
 ISLAM: total/complete submission or surrender to the will of God (Allah), and a
Muslim is one who so submits.
 Islam is not mere religion but a “deen”, meaning “the way of life”. It touches
upon the material as well as spiritual dimensions of human existence.
QS Al Maidah:3
ِ ْ ‫ْت لَ ُك ُم‬
…….. ۗ‫اْ ْْ ََ َم ِد ْينا‬ ِ ‫ت َعلَ ْي ُك ْم نِ ْع َمتِ ْي َو َر‬
ُ ‫ضي‬ ُ ‫…… اَ ْل َي ْو َم اَ ْك َم ْل‬
ُ ‫ت لَ ُك ْم ِد ْينَ ُك ْم َواَتْ َم ْم‬
....’“This day I have perfected your religion for you, complete My blessing on
you and approve Islam as the way of life for you” …
SHARIA and ACCOUNTING
 The principal sources:
 The Qur’an, which is considered by Muslims to be the exact words of revelation from
Allah to Prophet Muhammad, and
 the Sunnah (the acts and sayings of the Prophet as transmitted through traditions
known as hadith).
 Principles derived from these two main sources (+opinions of ulama) constitute
the Islamic law (Shari’ah Islami’iah or Sharia)
 Part of sharia known as fiqh al-mu’amalat concern with “jurisprudence of inter-
personal relations”
 Islamic Finance and Islamic Accounting principles fall in the category of fiqh
muamalat
 “SHARIA ACCOUNTING” or “ISLAMIC ACCOUNTING”?
COMMERCE AND BUSINESS IN
ISLAM
 Commerce is afforded an important place in Islam
 The Prophet Muhammad (pbuh) himself was a successful businessman
 The Prophet (pbuh) urged His followers to take up trade, farming, and
other economic activities.
 How commerce should be conducted, what is lawful (halal) and what
is prohibited (haram) is laid down in the Islamic Sharia.
 The governing principles of commerce and business in Islam, derived
from the Islamic Sharia
 Business entities are expected to seek a reasonable profit.
 The generation of profit, however, is not earned at the expense of, or
through the exploitation of others
ACCOUNTING IN ISLAMIC SOCIETY

the Sharia influences specific accounting


practices in Islam:
 firms prepare financial statements for a number of different
purposes at the end of every accounting period. One of these purposes is to
enable zakat to be calculated and paid.
 the Sharia guides the standards used by
accountants in their reporting, defines what is true and fair, and what the
principles of good corporate governance and sustainability are.
Baydoun et al, 2018
A Brief History of Islamic Accounting

 Accounting practiced in regions where Islam is the majority religion:


accounting in the Middle East, North Africa,
much of Sub-Saharan Africa,
parts of the Indian subcontinent,
a large part of South-East Asia, and
parts of the former Soviet
Union and the Balkans.
Historically, Islamic accounting would also include
parts of Spain between the eighth century CE (184H) and fifteenth
century
CE (905H).
A Brief History of Islamic Accounting
 The existence of accounting records to track revenues and expenses dates back
to the early Islamic State. It is likely that the bookkeeping principles that underpin
modern accounting systems originated in the Muslim world, and that the
subsequent development of accounting mechanisms elsewhere was influenced
by them.
A Brief History of Islamic Accounting
A Brief History of Islamic Accounting
A Brief History of Islamic Accounting

 WESTERN and ISLAM history of acc => similar practice of rec and
reporting, HOWEVER..
 accounting procedures is influenced by cultural and religious
considerations
 requires taking a normative-deductive approach to understanding
why the rules of Islamic accounting are as they are
ETHICAL CONSIDERATION IN
ISLAMIC ACCOUNTING
 DIRECT AND DETAILED
 COMMUNITY ORIENTED
 ADVOCATES WELFARE OF THE GROUP
 ADVOCATES the merits of long-term investments in social capital
 not hostile to capitalism per se, BUT Islam promotes those things that
are often seen to be deficient in capitalism
 Inequalities in wealth are not seen as bad in themselves, but too
much inequality is seen as socially destructive
ETHICAL CONSIDERATION IN
ISLAMIC ACCOUNTING
ETHICAL CONSIDERATION IN ISLAMIC ACCOUNTING
ISLAMIC PRINCIPLES AFFECTING
FINANCIAL REPORTING
Two approach for the development of theories acceptable in Islamic
Accounting:
 derive the objectives from the principles of the Islamic Sharia and
then consider these objectives in relation to conventional
accounting practices.
 start with the objectives of conventional accounting and test these
against the principles of the Islamic Sharia; those that pass the
Sharia principle test will then be accepted (as taken by AAOIFI, IAI,
etc)
ISLAMIC PRINCIPLES AFFECTING
FINANCIAL REPORTING
Several haram issues

 Interest (riba)
The prohibition of interest aims to encourage money owners to actively contribute
to economic activities, promoting the accumulation of wealth through hard work.
 Profit and the accumulation of wealth
ISLAM: community oriented economic growth
wealth should provide benefits that result in the betterment of the community at
large => zakat
The Quran states (9:34, 35):
Proclaim a woeful punishment to those that hoard up gold and
silver and do not spend it in God’s cause.

WESTERN: wellbeing of the society => invisible hand


THE USERS OF ISLAMIC ACCOUNTING
INFORMATION i.e Stakeholders
 Individuals use accounting information in their daily business to manage
their accounts, evaluate job prospects, and make investment decisions.
 Managers of organisations use accounting information in their planning,
control, and resource allocation functions within their business
organisations.
 Investors use accounting information to assist them in their investment
decision making about the allocation of resources to various investment
opportunities and in the regular evaluation of their investment.
 Non–interest-based creditors or benevolent loan creditors use
accounting information to assist in assessing the ability of their clients to
pay back their loans when due.
THE USERS OF ISLAMIC ACCOUNTING
INFORMATION i.e Stakeholders
 Government regulatory agencies use accounting information to
assess compliance with regulations and the social impact of
organisations, as well as their public accountability.
 Zakat authorities use accounting information to assess the accuracy
of the computation of zakat by individual Muslims and Islamic
businesses.
 Other users include employees, who use accounting information in
their wage demands; consumer groups; and the general public
THE USERS OF ISLAMIC ACCOUNTING
INFORMATION i.e Stakeholders
 The needs of these users not only differ but also may conflict: the US
FASB statement of financial accounting concepts states that the
objective of
financial statements is to provide information to ‘investors, creditors,
and others’.

 In Islam, in contrast, the ultimate accountability is to Allah for both


individual and organisation actions.
 Taklif, which is ‘responsibility according to capacity’, implies that
larger organisations have greater accountability to society, and also
indicates that the ‘society in general’ user group is of greater
importance than shareholders and creditors.
USER GROUP CLASSIFICATION

 INSIDE ORG
 OUTSIDE ORG
ISLAMIC ACCOUNTING SERVICES

 FIN ACC
 MGT ACC
 Sharia Auditing
 Zakat Accounting
 TAKAFUL ETC

Islamic acc PROFESSION

 Those who work in entities not specifically declare as Islamic


 Deal with “Islamic” transactions
 Those who work in the so-called “Islamic” entities
 Islamic banks
 Islamic insurance
 Other Islamic org: foundations, charity etc

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