Islamic Accounting - its Principles & Comparison with Conventional Accounting
The accountants who have been brought up with the knowledge that accounting is a technical, value-free and objective discipline. And, it is hard to accept when the same idea is connected with some religious principles, such as accounting in Islam. As a matter of fact, Islamic society operates under different principles and assumptions. While operating a business, they have the role of stewardship toward society. Similarly, guidelines of the Shariah also have defined duties towards employees, customers and competitors. That is why, objectives of Islamic accounting are different from those of conventional accounting. Here are the two main reasons:
- Islamic banks deal within a Shariah framework. As a result, the nature of their transactions is different from that of conventional banks.
- The users of the information generated by Islamic financial institutions have different needs from the users of the information published by conventional institutions.
Recently, it has been noticed that the principles of accounting in Islam are now adopted by some of the famous international banks.
What is Islamic Accounting?
Islamic Accounting can be defined as an accounting framework which plans to furnish clients with data empowering them to manage their organizations and associations as indicated by Shariah, or Islamic law.
Islamic Accounting Principles
Accounting in Islam is a moral and ethical code of conduct and there is no concept of interest. There are two basic principles on which the Islamic Accounting works. These are:
Under all circumstances, the justice should be maintained within the society. It has to be assured in the banking system that everything is managed according to the rules and regulation of Islam. In Islamic Accounting, the system is now allowed to exploit others.
Benevolence is related to perfection and beauty in Islam. It is the one principle that will keep us away from bitterness and undesirable things. It will make the banking procedure manageable. It would be easier to meet the requirements of the public.
Comparison of Islamic Accounting with Conventional Accounting
The conventional accounting is based on interpreting and classifying the data. Information that is delivered to the customer is well-thought to assure that he will invest in the accounting and banking system. The major difference between Islamic Accounting and conventional accounting is that how the information is shared. Accounting is Islam provides all the information clearly to the prospect, while in conventional accounting selected information is given.
Some Islamic Accounting Definitions
The following definitions set out a general conceptual framework for the Islamic accounting.
An asset is anything that is capable of generating positive cash flows or other economic benefits, either itself or in combination with other assets.
A liability is an obligation arising from transaction or other event that has already occurred and that involves the Islamic bank in a probable future transfer of cash, goods or services, or the forgoing of a future cash receipt, the date of which and the settlement of which are measurable with reasonable accuracy. Generally, a liability should be enforceable under the Shari’ah rules. But if an Islamic bank incurs an obligation which is not valid under the Shari’ah it will still have to be recognized as a liability, although disclosed distinctly as such.
Equity of Unrestricted Account Holders
The equity of unrestricted account holders refers to funds received by the Islamic bank from depositors on the basis that the bank will have the right to use those funds without restrictions to finance the bank’s investments within the Shari’ah framework.
Ownership equity in Islamic accounting refers to the amount remaining on the balance sheet date from the bank’s assets after deducting the bank’s liabilities, the equity of unrestricted investment.
Cash and Cash Equivalent
The cash and cash equivalent, in Islamic accounting, include local and foreign currency and demand deposits at other institutions.
Restricted investments are assets acquired by fund provided by holders of restricted investment accounts. The Islamic bank does not own these assets. The bank only manages them either for a fixed fee or, in a Mudarabah contract for profit.
Zakath is an obligatory payment on certain types of wealth and income. It has been prescribed in the Qur’an, and Sunna of the Prophet (PBUH). The Islamic banks have a dual role with regard to this obligation. They collect zakat from the owners, account holders, employees and any body else who wishes to pay it through the Islamic banks. The banks can charge a fee for managing this fund. For accounting in Islam, the fee will be the bank’s income. The second role of the bank is to calculate the zakat liability of the owners and pay it into a zakat fund.
Al-Qard Al Hasana Fund
The Qard al Hasana fund consists of revolving funds for extending interest-free loans for a period of time. In some cases, the loans may be forgiven.
Islamic Financial Accounting Standards
Accounting in Islam has some important standards and some of them have been listed below:
- Management of an information library including the industry reports, standards and reference books.
- Delivering the reports and IKFC research to the stakeholders of the company.
- With the Islamic finance leaders conducting a survey.
- All the discussion with the policymakers and experts is shared with the member of the team.
- To share leadership with market and clients, special magazines are published.
Islamic Accounting will provide you complete control over your accounts, the profit you have earned and other information related to the business. It will help in the growth of your organization in the best possible way. We have designed a detailed course on Islamic Accounting, included is a part of our Islamic finance certification and Islamic finance degree programs.
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