Sunday, October 30, 2011

Islamic Accounting

As the blog's name COMPARTIR ES BUENO in Spanish which means SHARING IS CARING, I want to share with you about Islamic Accounting. The sources about this topic is very limited. So, I find the articles, journals, thesis and book to understand about it. 

Here, one of the book that I bought from my lecturer. Actually the cost is RM60+ but my lecturer can get it with RM51. The content covers what is Islamic Accounting, the concepts, Financial Reporting for Islamic Financial Institutions, Accounting for Islamic Deposit and Investment Account, Zakat Accounting for Business Wealth and How to calculate for Mudarabah, Musharakah, Murabahah and Ijarah financing.

From my reading, I think the note below will help you to know the basics knowledge in Islamic Accounting and the differences with Conventional Accounting.

Accounting can be defined as the process of identifying, measuring and communicating economic information in order to permit informed judgement by the users of information.

Accounting can be distinguished into two basic functions which are financial accounting and management accounting. Financial accounting provides information to people outside the firm while management accounting generates confidential information for internal decision makers, such as top executives and department heads.

Islamic Accounting  is the process which provides appropriate information to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shariah and delivering on its socioeconomic objectives. Besides, it is also a tool which enable Muslims to evaluate their own accountabilities to God.

Conventional vs Islamic Accounting

         Based on upon modern commercial law permissive rather than ethical
           Based upon ethical law originating in the Quran and Sunnah
         Limited disclosure (provision of information subject to public interest)
          Full disclosure (to satisfy any reasonable demand for information in accordance with the Shariah)
     Personal accountability (focus on individuals who control resources)
           Public accountability (focus on the community who participate in exploiting resources)

Objectives of Islamic Accounting
According to Khan, in Harahap (1992) as below:
                                i.            To report the accurate income determination
                              ii.            To promote efficiency and leadership
                            iii.            To make the trade transactions comply with Shariah priciples
                            iv.            Commitment to justice
                              v.            To report a good things

Hayashi (1989) thought that the objectives of Islamic accounting for any trade transactions in Islam as below:
                                i.            To avoid fraudulent practices in business and society
                              ii.            To check and audit the illegal contract
                            iii.            To keep free market and fair price
                            iv.            To prevent necessities from being hoarded

So, from this two opinions, I conclude that the objectives of Islamic accounting for any trade transactions in Islam as below:

  • To satisfy both parties who involve in trade transactions because in Islam, all the transactions has been recorded and documented accurately without reducing the rights of anyone.
  • To avoid fraudulent practices in business and society, so that the transactions should be recorded by a person who is really obey to Allah.
  • To make the trade transactions comply with Shariah principes. Therefore, in Islam, every trade transactions should provide witnesses and evidences.                                                                     Based on the verse of Al-Baqarah, 282, we know that Islam emphasizes us to record any transactions accurately. Moreover, if the transactions deal with installment, the parties who involve in that transactions suppose to specify the period of the loan which is the length of time the loan must be repaid. The installment transaction should be recorded by the honest person and need the witnesses and evidences. From this verse, we know that Islamic accounting promotes not only for the transactions but for the whole matter regarding the rights of both parties and ethical conducts in economics. 

Let see this video about the interpretation of Al-Baqarah, 282. Actually, this video is created by my group and will be use in our presentation. Unfortunately, we cannot present this verse. It is because another group already present it. So, it's my pleasure to share this slide with you...

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