Were Islamic Records Precursors To Accounting Books Based On

The Italian Method by Omar Abdullah Zaid

INTRODUCTION

The Italians borrowed the concept of double entry from Arabs (Have 1976, p.11)

Europe at that time ‘was temporarily at standstill, and we shall therefore not expect to find a visible or appreciable progress in

method of accounting during the period ( Woolf, 1912, p. 54)

Prior to the establishment of Islamic State in 622, the geographical scope of Arabic commercial and financial activities was very limited and were concentrated in the hands of a few families in Makkah and Middle East region.

The conventional trade (continued after 622 till year 10 Hijri’ah (H) 632)

There are 2 major trade session

Winter Trade Journey• Directed to Yemen

Summer Trade Journey• With Ash-Sham (today known as Syria, Lebanon, Jordan, Palestine and

Israel)

Year 8 H ( 630)- Arab embraced Islam and became preoccupied with the spread of Islam beyond Arabian Peninsula and stretching their commercial activities beyond Middle East.

Arab ‘sailed their galleys along the costs of Arabia and India, arrived in Italy with luxury goods unknown in Europe’ (Have 1976, p. 13)

- The increasing commercial activities of Muslim traders necessitated the pooling fund to finance increasing of fund to finance increasing European demands for the goods.-Led to emergence of Partnership

Need for proper accounting record and report (required by Quran):- To account entrepreneurs and partners-Requirement of Zakat as detailed in Shari’ah Islami’iah

Early stage of Islamic State

- Zakat and other revenues were

not of great financial

significance and not recorded.

During the time of Caliph Omar bin Al-Khattab, -the geographical expansion led to

significant increases in

revenues and the responsibilities of the Islamic State.

-Sahaby recommended the establishment of

records to account the state’s revenues

and expenses (recommended by

Al-Waleed bin Hisham Al-Mugierah)

Caliph Omar bin Al-Khattab established

Diwan, but the contribution of Muslim traders

cannot be ignores.

Muslim traders were religiously motivated to aimed at the measurement of profits and capital growth for payment of Zakat to Baitul-Mal (public treasury)• Zakat (religious levy) did not require the assessment of

individuals by states as the case is today

Zakat is a liability entrusted to Muslim. It is received from those who pay it freely’ those who don’t pay it are folled by Allah’ (The Ulamma)

Shari’ah Islamiah specifies the source of Zakat, its rates, calculations and application of the fund received from Zakat.

FACTORS THAT CONTRIBUTED TO THE DEVELOPMENT OF ACCOUNTING

RECORDS BY MUSLIM

1. ZAKAT

2. BAITULMAL

3. DELEGATION OF DUTIES

Zakat

obligatory payment made annually under Islamic law on certain kind of property and

used for charitable and religious purpose.

Zakat fitrah

(al-fitr)

Zakat from

earning (al-mal)

1

Careful recording and

proper observation of

the date of occurrence

(al-haol)

Concept in

calculating

zakat

Required the maintenance of

adequate records and the preparation

of accounting reports to discharge

the responsibility paying zakat as

required by shariah.

Baitulmal

Financial institution responsible for the

administration of taxes in accordance with shariah.

FunctionManaging personal

finances and government

expenditures.

Distribute zakat revenue

for public works

2

• The obligation of paying Zakat encourage the Baitulmal to make financial reports periodically.

• All finance activities must be recorded and the date, month and year must be stated.

• Changes is cash flow must be explained.• Each account is need to be audited by the

higher officials.• Doubles entry was practiced widely in

Baitulmal, based on al-hisab concept.

Delegation of

duties

Reason to delegate :- Identify and classify of

specialized skill- Prevent the accumulation of duty under one person.

Necessary to select employees with the appropriate knowledge and/or experience

in the particular field of employment.

Use concept of Ash-Shura’ ( consultation)

3

ACCOUNTING RECORDS DEVELOPED BY MUSLIMS

• The first person introduce bounds records and registers was Caliph Al-Waleed bin Abdul-Malek (86-96)

• Diwan Al-Kharaj and Diwan Al-Jund were assigned to Khaled bin Barmak, to maintain the books of accounting

• This has effect in development in accounting practice in the Islamic state.

• The reviewer is appointed to review the books

• Accounting was classified into specialization :– “reviews of books” – auditing– “stable accounting” – accounting for livestock– “construction accounting” – “rice-farm accounting” – agriculture accounting– “ warehouse accounting– “ mint accounting” – currency accounting– “sheep-graving accounting – farm accounting– “treasury accounting

• Audit function in the Islamic State :– Al- Hariery suggested that accounting is subject to

verification– Self-control and self-judgments was emphasize

during that time which are the reflection of accountability

• The primary book recording was named Jaridah– Accounting clerk had to maintain the books, sign his

name at the end of the book, and stamp it with the sultan’s seal

– The Jaridah start with the phrase “ In the Name of Allah, the Most Gracious, the Most Merciful

– This is similar in the Pacioli records. Thus support that Italian adopted knowledge from another culture

– The Jaridah and other accounting books were developed and used

Jaridah

- to records a specific type of zakat imposed on earnings from land, crops and animals - similar with receivable subsidiary ledger- the organization of Jaridah Al-Kharaj is in alphabetical order-the indexing was geographically based to facilitate the identification of collection made by the levy collectors- this was important for the preparation of the budget of the Wilayah

Types of Jaridahi)Jaridah Al-Kharaj

-maintained by Diwan An-Nafakat- All expenses relating to the state were recorded and supported by relevant evidence

- maintained by Diwan Al-Mal- responsible for the receipts of zakat and its payment.

-maintain by Diwan Al-Musadareen- records fund confiscated from individuals not complying with the requirements of Shari’ah Islami’iah

ii) Jaridah Annafakat (expenditure journal)

iii) Jaridah Al-Mal (funds journal)

iv) Jaridah Al-Musadareen (consfiscated funds journal)

• Omar bin Abdul Aziz is the first caliph to make the issuance of receipts mandatory

• There are three types of money collected :i) Daftar Al –Yawmi’iah (daily book)ii) Daftar Attawjihat (books of directions)iii) Daftar Attahwilat ( books of transfers)

Daftar

-to records expenses and other financial transaction associated with Zakat Al-Kharaj -should follow the date of occurrence and comply with prescribed recording procedures-the recording procedures was subject to preparation of Ash-Shahed

Types of Daftar• Daftar Al –Yawmi’iah (daily book)

-to record budget expenses-similar to general ledger-used to control regional expenses and to ensure province compliance with budget allocation.- two types of budget :a) Mukarrariyah – operational budgetb) Itlakiyyah –discretionary budget

Types of Daftar

Daftar Attawjihat (books of directions)

-to record transfer of funds between the Wilayah and the central government-maintain by each Wilayah within the Islamic State- the central government approved the budget for each Wilayah - the difference between Daftar Attahwilat and Daftar Attawjihat will transferred to or from the central government and recorded in Daftar Attahwilat

Types of Daftar

Daftar Attahwilat ( books of transfers)

ACCOUNTING REPORTS

• Control & accountability objectives.• Zakat & partnership as the main reasons

• From the perspectives of Zakat:Reflects the results of financial positions &

operations to calculate Zakat payable.

• From the perspectives of partnership:Active partners to account for their

stewardship of their partnership.

Determination of zakat payable of a partner based on their portion of profit & assets appreciation.

Definition : final or end Prepared at the end of each month / financial year Initially prepared for government monthly report

TYPES OF REPORT

AL KHITMAH

Definition : Comprehensive final reportPrepared annually by the accountantCovered all financial activities of the relevant DiwanShowed the Diwan’s itemized revenues, expenses,

and surplus or deficit at the end of the financial year.

TYPES OF REPORT AL KHITMAH AL JAME’AH

WHY???a combined Income

Statement and Balance Sheet

Includes current and capital expenditure

If accepted by the head of department

called as Al-Muwafakah (acceptance) approval of the report balances by

the head of the department

If not accepted by the head of department

called as Al- Muhasabah (account) based on the discovery of the

requirement for further justifications, clarifications, adjustments, or restructuring of the report’s contents.

Ar- Ra’ej Menal Mal• Collectable debts

Al-Munkaser Menal Mal• Uncollectible debts

Al-Muta’adhdher Wa-Al-Mutahayyer Wa-al- Muta’akked• Difficult, doubtful, and complicated debts

CLASS OF FINANCIAL REPORTS(FOR THE PROTECTION ON CAPITAL)

Al-Khitmah Al Jame’ahIn the name of Allah, the Most Gracious, the Most merciful

Al-Khitmah Al-Jame’ah for Receipts and Expenses during the periodMuharram 1 to Dhul-Hejjah 30, Year.......H

Prepared by......., Assisted by........, Supervised by.........., Approved by............

Sources of FundsREVENUES FOR THE PERIODa) Levies received from........., date received.............., XXXb) Other income, its source........, date received............, XXX SUBTOTAL XXX

ADDa) Brought forward from last financial year XXXb) Sales XXXc) Reconciliations and Fines XXXd) Loans XXXe) Unclaimed Deceased Estate XXXf) Transfers XXX XXX Al-Fadhlakah (Total) XXX

Use of Fundsa) Transfers to other Diwans XXXb) Purchases made by this Diwan XXXc) Other Expenses XXX XXX

Al-Hasel (Balance) XXX

CONCLUSION

• The type, layout and names of some of the records used in Islamic State are similar to those used in the Italian Republics.

•The commercial links between Muslim and Italian traders would have influenced the development of accounting records in the Italian Republics.

- name of primary books- layout of some books

In conclusion, this journal argues that the development of accounting records and reports in the Islamic State have most likely contributed in the development and practice of accounting in the Italian Republics as documented by Pacioli in 1494.