ISLAMIC
ACCOUNTING
Chapter 1: Accounting and
Islamic Worldview
Introduction
“The traditional Western double-entry
based accounting technology is wellsuited to an orthodox, positivist
society of any kind. It is not surprising
that it is proving inadequate, as
people are returning to more
integrated world views, whether
Islamic or otherwise” (Hayashi, 1989)
Objective
1. Outline the nature of accounting and
its environment
2. Fundamental principles of Islamic
worldview – the development of
accounting theory
3. Interaction between Islamic
worldview and accounting
Accounting And Its Environment
1.
2.
3.
4.
5.
Definition
Role
Types
Governance – FRS/IAS/Bank Negara
Equation
Critics on Conventional
Accounting
• Externalities is not included in financial
report (Lee Parker, environmental
accounting)
• Intangible asset cannot be measured
adequately(Lev Baruch)
• Human resources and employee reporting
interest are not included.
• Social Interest is overlooked
• Promote the exploitation of capitalist over
labor and society.
• Promote the concentration of wealth and
power of the hand of the rich.
2. Islamic Worldview And
Accounting
What is Islam?
• Literally meaning:
• “Peace” (in this world and hereafter)
• “obedience” to Allah as his/her God, comply
with the motivation of God’s creation of Man,
which is “to serve Allah”, to be “his viceregent
on earth”.
• A comprehensive worldview, a unity of Allah,
and an integration between world and hereafter.
• Islamic principles: truth, justice, fair, goodwill,
honesty, benevolent, accountability before the
God.
Islamic Rules:
• Allah (God) gives two guidance for mankind:
• al-Quran (revealed word of Allah ) and
• Hadist/Sunnah: Prophet Saying, Allah’s
inspired acts, description of the conduct of
the prophet’s companion of which
Mohammad was uncritical.
• Ijtihad/ijma’: shuratic and consensus
process.
• Guidance are related to all daily life of
mankind including in business,
management, and finance.
• The phenomena of nature can be also a
sign of Allah’s power and existence.
The purpose of shariah (Islamic
law) (Al-Gazali: 1058-1111)
• To promote the welfare of the people
which lies on:
• Safeguarding of their faith
• Their life
• Their intellect
• Their posterity and
• Their Wealth
Islamic concepts
• Falah - to achive Allah’s pleasure
• Tawhid – unity of God
• Khilafah (vicegerent) – man as trustee
on the earth
• Taklif – accountibility
Ancient Accounting Role in Islamic
State is Muhasabah, it means:
•
•
•
•
•
•
•
Calculation of one’s act
Clear the account, make neutral
To take care of, to try to find
To anticipate a reward in the hereafter
To take into account, into consideration
To order Muslim to perform their duties
To avoid fraudulent practices in business
and society, to check illegal contract, keep
free market and fair price, prevent
necessities from being hoarded. (Hayashi,
1989)
Examples of Unlawful
Business Practices in Islam:
• There is lawful (halal) and unlawful (haram)
in business
• Riba, usury or interest on credit: increment
over and above the amount of of capital
loaned.
• Favor Equity financing than debt financing
• Pork, Alcoholic drinks
• Speculative transaction, gambling,
dishonesty, collusion, uncertainty,
manipulation, fraud, free market
interference, exploitation, hoarding.
3. Accounting Objectives : An
Islamic Perspectives
Accounting objective
• Conventional accounting concentrates
on identifying economic events and
transactions
• Islamic accounting must identify
socio-economic and religious events,
and transactions
– Fulfill the ultimate accountability to Allah
– Ensure fair and just financial transaction
between human beings
Accounting In Al Quran : Debt Contract And
Accounting
Accounting In Al Quran : Debt Contract And
Accounting
“ O ye who believe! When ye deal with each other, in transactions
involving future obligations in a fixed period of time, reduce them to
writing let a scribe write down faithfully as between the parties; let not the
scribe refuse to write: as Allah has taught him, so let him write. Let him
who incurs the liability dictate, but let him fear his Lord Allah, and not
diminish aught of what he owes. If the party liable is mentally deficient, or
weak or unable himself to dictate, let his guardian dictate faithfully. And
get two witnesses, out of your own men, and if there are not two men,
then a man and two women, such as ye choose, for witnesses, so that if
one of them errs, the other can remind her. The witnesses should not
refuse when they are called on (for evidence). Disdain not to reduce to
writing (your contract) for a future period, whether it be small or big: it is
juster in the sight of Allah, more suitable as evidence, and more
convenient to prevent doubts among yourselves but if it be a transaction
which ye carry out on the spot among yourselves there is no blame on
you if ye reduce it not to writing. But take witnesses whenever ye make a
commercial contract; and let neither scribe nor witness suffer harm. If ye
do (such harm), it would be wickedness in you. So fear Allah; for it is
Allah that teaches you. And Allah is well acquainted with all things.”
AAOIFI Standards Objectives
1. To develop accounting standards for
Islamic financial institutions as
harmonization of accounting
practices
2. To facilitates the needs of the users of
accounting information of Islamic
financial institutions
Objectives developed by
AAOIFI
1. Accounting for Islamic Financial
institutions
2. Financial Accounting
3. Financial accounting and financial
reports of Islamic Banks
CONCLUSION
ISLAMIC ACCOUNTING can be defined as the
“accounting
process”
which
provides
appropriate information (not necessarily limited
to financial data) to stakeholders of an entity
which will enable them to ensure that the entity
is continuously operating within the bounds of
the Islamic Shari’ah and delivering on its
socioeconomic objectives.
Islamic accounting is also a tool, which enables
Muslims to evaluate their own accountabilities to
God (in respect of inter-human/environmental
transactions
Islamic Accounting
• 1. To report accurate income
determination
• 2. To promote efficiency and
leadership
• 3. To comply with the shariah (Islamic
principles)
• 4. Commitment to justice
• 5. To report a good things
• 6. To adapt to positive social change.
(Khan, in Harahap, 1992)
Conventional Vs Islamic
Accounting
• Conventional Accounting:
• Based
upon
modern
commercial law-permissive
rather than ethical
• Limited disclosure (provision
of information subject to
public interest)
• Personal accountability
(focus on individuals who
control resources)
• Islamic Accounting:
• Based upon ethical law
originating in the Qur’an
(Islamic law, As-Sunnah)
• Full disclosure (to satisfy
any reasonable demand for
information in accordance
with the Shari’a)
• Public accountability (focus
on the community who
participate in exploiting
resources)
Conventional vs Islamic Accounting:
(Boudyn and Willet, Islamic Corporate Reports,
Abacus, Vol. 36, No.1, 2000).
•
•
•
•
•
•
•
•
Conventional Acc.
Economic rationalism
Secular
Individualistic
Profit maximization
Survival of fittest
Process
Absolute ownership
•
(Ec. rationalism: the desire to stand
apart from others, to compete, to
manipulate and to amass surplus”)
•
•
•
•
•
•
•
•
Islamic Acct.
Unity of God
Religious
Communal
Reasonable profit
Equity
Environment
Relative ownership
Toshikazu Hayashi, “On Islamic Accounting,
IMES Working Paper Series No.18.
•
•
•
•
• Islamic Accounting
Society – oriented
Focus on society aspect
Basically Al Qur’an & As
Sunnah (Shariah)
Religious (must
responsibility to God at the
Judgment Day)
• Conventional Accounting
• Individuality – oriented
• Focus on individuality
aspect without consider any
social aspects
• Accounting Law and Ethics
• Secular
Hayashi (Continued)
• Islamic Accounting
• No differentiation between
Normative and Descriptive
Accounting (They always
going simultaneously)
• In operational, they do
everything in boundaries of
Islam (Shariah)
•
• Measure as saleable value
• Market (selling) price rather
than historical cost
• Conventional Accounting
• The normative accounting
always influencing
descriptive accounting or
individuality interest
•
• In operational, they permit
everything to reach the
highest profit
• Measure as highest possible
profit
• Historical Cost
Problems of Rationalism
• The supreme power lies on human or power
holder not on God
• Man guided by the concept of self interest
and overlook the social interest
• Man has no inherent justice but true
opportunists.
• Social imbalance and social conflicts due to
concentration of wealth and power in a few
elites
• Global ecological destruction
Next week’s class discussion:
Please prepare answers for questions
in text book page 21;
–Q1.1
–Q1.3
–Q1.4
Many thanks for your attention
WASSALAM