overview of islamic accounting
TRANSCRIPT
7/30/2019 Overview of Islamic Accounting
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7/30/2019 Overview of Islamic Accounting
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• LEARNING OBJECTIVES
• Appreciate what is meant by Islamic
Accounting and the purpose it has
served over time
•
Explain the importance of understanding Islamic accounting
theories.
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CONTRAST OF ISLAMIC ACCOUNTING TO
TRADITIONAL ACCOUNTING
• Definition
•
Islamic Accounting - Accounting process which provides appropriate information
[not only financial data] to stakeholders
of an entity that will enable them to ensure
that the entity is continuously operating
within the limits of Islamic Shari’ah and
delivering on its socioeconomic objectives.
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• Conventional Accounting
• Accounting process aims to allow
informed decisions whose ultimate
purpose is to efficiently allocate
scarce resources available to their
most efficient [and profitable] uses
by providing information efficiency in
the market.
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• Operations
• Islamic Accounting: In operational, itperforms everything within the limits
of Islamic Shari’ah.
• Conventional Accounting: In
operational, it allows everything toachieve maximum profit
•
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• Nature
• Islamic Accounting: It is
conceptualized based on the Islamic
principles
•
Conventional Accounting: It isconceptualized based on principles of
secularism and capitalism
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• Governance
• Islamic Accounting: It is governed by
Al- Qur’an and Sunnah or Islamic
Shari’ah
•
Conventional Accounting: It is governby Accounting and commercial law
and Secular Ethics.
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• ORIENTATION
• Islamic Accounting: It is always society
or community oriented
• Conventional Accounting: It is always
firm or individual oriented
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• Cost or Price
• Islamic Accounting: Market or Selling
price rather than Historical cost is
preferred
• Conventional Accounting: Historical
cost rather than Market price is
preferred
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• Disclosure
• Islamic Accounting: Full disclosure tosatisfy any reasonable demand forinformation in accordance with theShari’ah
•
Conventional Accounting: Limiteddisclosure provision of informationsubject to public interest
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• Unit of Measurement
• Islamic Accounting: Quantity based and
monetary based [Zakat calculation]
• Conventional Accounting: Monetary
value based
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• Accounting Period
• Islamic Accounting: One lunar year for
Zakat calculation
• Conventional Accounting: Periodical
measurement of performance
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• Equity
• Islamic accounting: Recognize each
party equally
• Conventional Accounting: Survival of the
fittest
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• Profit
• Islamic Accounting: Determine accurate
and reasonable profit
• Conventional Accounting: Tries to
maximize profit
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• Ownership
• Islamic Accounting: It recognizes
relative ownership on assets
• Conventional Accounting: It recognizes
absolute ownership on assets and firm
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• Accountability
• Islamic Accounting: Publicaccountability focusing on thecommunity who participate in exploitingresources
•
Conventional Accounting: Personalaccountability focusing on individuals who control resources
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• Conservatism
• Islamic Accounting: Most favourable to
society [justice]
• Conventional Accounting: Most
favourable impact on owners and least
favourable to society
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• Consistency
• Islamic Accounting: Consistency based
on Shari’ah
• Conventional Accounting: consistency
based on GAAP
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• Going Concern
• Islamic Accounting: Business continues
not forever but depends on contractual
agreement between parties
• Conventional Accounting: Business
continues forever or unlimited period of
time
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• Objectives of Financial Statements
Balance
Sheet
Financial
Trust and
Obligations
Financial
Position
Income
Statement
Fulfilment of
Faith
Economic
Performance
Cash Flow CashEntrusted
CashPosition
Equity
Statement
Wealth
Entrusted
Wealth
Ownership
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• Features of Islamic Accounting
No different in terms of recording (doubleentry system)
Clear distinction of Accounting Objectivesi.e. religious obligation vs. commercialobligation (different significance of financial statements)
Different users information need
(legitimate and equitable transactions and wealth vs. maximization of wealth andeconomic consequences)
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• Features of Islamic Accounting ( cont.)
Compliance with the principles and rules
of Syari’ah
Different Islamic contractual relationships(mudarabah instrument; murabahah etc.)
Distinct accountability relationships (to
Allah SWT and Ummah)Determination of zakat
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• User Groups of Accounting
Information for Islamic Banks
Investors (potential and existing)
(lawful and equitable investment)Creditors (potential and existing)
(lawful trade assets)
Regulators
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• 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 of information
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•
Statement of Financial Position
Income Statement
Cash Flow Statement
Statement of changes in equity
Statement of sources and uses of good
faith qard fundStatement of sources and uses of zakah
and charity fund
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• DISCLOSURE
• Statement of Financial Position
•
Cash and cash equivalent
Receivables ( Murabaha, Salam, Istisnaa)
Investment securities
Mudarabah investment
Musharakah investmentInvestment in other entities
Inventories
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• (cont.)
Investment in real estate
Assets acquired for leasing
Other 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
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• DISCLOSURE (cont.)
•
Current accounts, saving accounts andother accounts with separate disclosure of each category
Deposits of other banks
Salam Payable
Istisnaa Payable
Declared but undistributed profitsZakah and taxes payable
Other accounts payable
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• DISCLOSURE (cont.)
•
Financial Institutions’ investment accountsCustomer’s investment accounts
•
Share capital
Treasury shares
Share premium
ReservesProposed appropriations
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• 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 asMudarib
• (=)The bank’s share in income (loss) from
investments
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• (+)The bank’s share in unrestrictedinvestment income as Mudarib
• (+) The bank’s share in restrictedinvestment profit as Mudarib
• (+)The bank’s fixed fee as an investmentagent for restricted investment
• (=/-) Other revenues, expenses, gains andlosses
• (-) General and administrative expenses• (=) Net income (loss) before Zakah and
taxes• (-) Zakah and taxes ( separate disclosures)• (=) Net income (loss)
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• Financial statement for changes in restricted
investments
• Restricted investments are not assets of theIslamic bank and should not be reflected in the bank’s statement of financial position.
•
•
The statement must show deposits and withdrawals by holders of restrictedinvestments and their equivalent as of a given date.
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•
• A fixed obligation calculated by reference
to net assets that have appreciated or have the
capacity to appreciate over a specific period of
time except for assets acquired for consumption
or used in production.
• Zakah should be
based on the company’s net assets, and the totalamount be divided between owners.
•
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•
• The period covered by the statement
• Bank’s responsibility for the payment of
Zakah on behalf of owners of unrestricted investment accounts and their equivalents.
• Payments and uses of funds during theperiod and available funds at the end of the period.