• LEARNING OBJECTIVES

• Appreciate what is meant by IslamicAccounting and the purpose it hasserved over time

• Explain the importance ofunderstanding Islamic accountingtheories.

CONTRAST OF ISLAMIC ACCOUNTING TO TRADITIONAL ACCOUNTING

• Definition

• Islamic Accounting - Accounting processwhich provides appropriate information[not only financial data] to stakeholdersof an entity that will enable them to ensurethat the entity is continuously operatingwithin the limits of Islamic Shari’ah anddelivering on its socioeconomic objectives.

• Conventional Accounting

• Accounting process aims to allowinformed decisions whose ultimatepurpose is to efficiently allocatescarce resources available to theirmost efficient [and profitable] usesby providing information efficiency inthe market.

• Operations

• Islamic Accounting: In operational, itperforms everything within the limitsof Islamic Shari’ah.

• Conventional Accounting: Inoperational, it allows everything toachieve maximum profit

•

• Nature

• Islamic Accounting: It isconceptualized based on the Islamicprinciples

• Conventional Accounting: It isconceptualized based on principles ofsecularism and capitalism

• Governance

• Islamic Accounting: It is governed byAl- Qur’an and Sunnah or IslamicShari’ah

• Conventional Accounting: It is governby Accounting and commercial lawand Secular Ethics.

• ORIENTATION

• Islamic Accounting: It is always societyor community oriented

• Conventional Accounting: It is alwaysfirm or individual oriented

• Cost or Price

• Islamic Accounting: Market or Sellingprice rather than Historical cost ispreferred

• Conventional Accounting: Historicalcost rather than Market price ispreferred

• Disclosure

• Islamic Accounting: Full disclosure tosatisfy any reasonable demand forinformation in accordance with theShari’ah

• Conventional Accounting: Limiteddisclosure provision of informationsubject to public interest

• Unit of Measurement

• Islamic Accounting: Quantity based andmonetary based [Zakat calculation]

• Conventional Accounting: Monetaryvalue based

• Accounting Period

• Islamic Accounting: One lunar year forZakat calculation

• Conventional Accounting: Periodicalmeasurement of performance

• Equity

• Islamic accounting: Recognize eachparty equally

• Conventional Accounting: Survival of thefittest

• Profit

• Islamic Accounting: Determine accurateand reasonable profit

• Conventional Accounting: Tries tomaximize profit

• Ownership

• Islamic Accounting: It recognizesrelative ownership on assets

• Conventional Accounting: It recognizesabsolute ownership on assets and firm

• Accountability

• Islamic Accounting: Publicaccountability focusing on thecommunity who participate in exploitingresources

• Conventional Accounting: Personalaccountability focusing on individualswho control resources

• Conservatism

• Islamic Accounting: Most favourable tosociety [justice]

• Conventional Accounting: Mostfavourable impact on owners and leastfavourable to society

• Consistency

• Islamic Accounting: Consistency basedon Shari’ah

• Conventional Accounting: consistencybased on GAAP

• Going Concern

• Islamic Accounting: Business continuesnot forever but depends on contractualagreement between parties

• Conventional Accounting: Businesscontinues forever or unlimited period oftime

• Objectives of Financial Statements

Islamic TraditionalBalance Sheet

Financial Trust and Obligations

Financial Position

Income Statement

Fulfilment of Faith

Economic Performance

Cash Flow Cash Entrusted

Cash Position

Equity Statement

Wealth Entrusted

Wealth Ownership

• Features of Islamic Accounting

No different in terms of recording (doubleentry system)Clear distinction of Accounting Objectives

i.e. religious obligation vs. commercialobligation (different significance offinancial statements)Different users information need

(legitimate and equitable transactions andwealth vs. maximization of wealth andeconomic consequences)

• Features of Islamic Accounting ( cont.)

Compliance with the principles and rulesof Syari’ah

Different Islamic contractual relationships(mudarabah instrument; murabahah etc.)

Distinct accountability relationships (toAllah SWT and Ummah)

Determination of zakat

• User Groups of AccountingInformation for Islamic Banks

Investors (potential and existing)(lawful and equitable investment)

Creditors (potential and existing)(lawful trade assets)

Regulators

• User Groups of AccountingInformation for Islamic Banks

Syari’ah Supervisory Board &Advisory Council (syari’ahcompliance)Customers (lawful goods andservices)Others who may be effected by thedisclosure or non-disclosure ofinformation

• General layout of Islamic Financial Statements (Islamic Bank)

Statement of Financial Position

Income Statement

Cash Flow Statement

Statement of changes in equity

Statement of sources and uses of good faith qard fund

Statement of sources and uses of zakahand charity fund

• DISCLOSURE

• Statement of Financial Position

• Assets

Cash and cash equivalent

Receivables ( Murabaha, Salam, Istisnaa)

Investment securities

Mudarabah investment

Musharakah investment

Investment in other entities

Inventories

• Asssets (cont.)Investment in real estateAssets acquired for leasingOther investments (disclosure of their

types) Fixed assets (disclosure of depreciation

for significant asset types )Other assets (disclosure of significant

types)

Note: No “current/fixed” groupings

• DISCLOSURE (cont.)• LiabilitiesCurrent accounts, saving accounts and

other accounts with separate disclosure of each categoryDeposits of other banksSalam PayableIstisnaa PayableDeclared but undistributed profitsZakah and taxes payableOther accounts payable

• DISCLOSURE (cont.)• Unrestricted investment accountFinancial Institutions’ investment accountsCustomer’s investment accounts

• EquityShare capitalTreasury sharesShare premiumReservesProposed appropriations

• DISCLOSURE (cont.)

Income Statement

• Revenues and gains from investments

• (-)Expenses and losses from investments

• Income (loss) from investments

• (-) Share of unrestricted investment account holders in income (loss) from investments before the bank’s share as Mudarib

• (=)The bank’s share in income (loss) from investments

• (+)The bank’s share in unrestricted investment income as Mudarib

• (+) The bank’s share in restricted investment profit as Mudarib

• (+)The bank’s fixed fee as an investment agent for restricted investment

• (=/-) Other revenues, expenses, gains and losses

• (-) General and administrative expenses• (=) Net income (loss) before Zakah and

taxes• (-) Zakah and taxes ( separate disclosures) • (=) Net income (loss)

• Financial statement for changes in restricted investments

• Restricted investments are not assets of theIslamic bank and should not be reflected inthe bank’s statement of financial position.

• The bank does not have the right to use or disposeof these investments except within the conditions ofthe contract between the bank and holders of theseaccounts.

• The statement must show deposits andwithdrawals by holders of restrictedinvestments and their equivalent as of agiven date.

• Statement of sources and uses of funds in the Zakah and Charity Fund:

• Zakah: A fixed obligation calculated by referenceto net assets that have appreciated or have thecapacity to appreciate over a specific period oftime except for assets acquired for consumptionor used in production.

• For Limited liability Company: Zakah should bebased on the company’s net assets, and the totalamount be divided between owners.

• Bank as an agent of Zakah

• Disclosure

• The period covered by the statement• Bank’s responsibility for the payment of

Zakah on behalf of owners ofunrestricted investment accounts andtheir equivalents.

• Payments and uses of funds during theperiod and available funds at the end ofthe period.

THANK YOU