ACCOUNTING CONCEPTS: AN ISLAMIC

PERSPECTIVEBy:

FAIZATUL HASLIYANTI GHAZALIACCOUNTING DEPARTMENTKULLIYYAH OF MUAMALAT

INSANIAH UNIVERSITY COLLEGE

This chapter examines conventional accounting concepts from an Islamic perspective.

The approach is not to develop the Islamic accounting concepts directly from the Islamic principles, instead the modern accounting concepts are tested against the Islamic values and Shari’ah principles.

Those concepts that are not violating the Islamic principles will be accepted and those that are found to be in violation will be then either rejected or modified.

Islamic accounting theory so far has not been properly developed.

Financial accounting generally deals with recognition, measurement, recording and presentation of the elements of financial statements.

Recognition to test whether the critical event concerning an element or financial transaction has taken place.

An example: When can a buyer of shares/bonds recognize an asset as his asset?

Measurement is the amount at which the element is to be recorded. Recording is the procedure of double entry bookkeeping system such as debiting and crediting the relevant accounts.

Accrual is the basis of accounting to recognize business transactions and events. Under the accruals basis, transactions and events are recognized when they occur and are recorded and reported in the financial statements in the period to which they relate irrespective of whether cash was received or paid.

Going concern assumption is where the financial statements are prepared on the assumption that the business will continue for foreseeable future.

Periodicity assumption is where economic activities of a business are divided into time periods.

4 principal qualitative characteristics: Understandability Relevance Reliability Comparability

ACCOUNTING ASSUMPTIONS:Unit concept

Requires the identification of economics activities that are associated with the Islamic financial institution as a separate entity can be expressed as the institution’s assets, liabilities, revenues, expenses, gains and losses.

Going concern concept

Is also applicable as many Islamic financial contracts especially musharakah and mudharabah are for a number of specific periods

We have assume that the contract shall continue until one or all of the parties involved decide to terminate such contracts

This is important for Islamic banks as it assumed, based on financial position and performance, the continuity of the bank’s activities in the future including its investment activities.

ACCOUNTING ASSUMPTIONS:Periodicity concept

Is also acceptable in Islam on the basis that even in the case of zakat, it is being paid once a year as a period of measurement

The concept of haul determined that the wealth must be owned at least one year to qualify for the payment of zakat

For Islamic financial institution means the life of the institution can be broken into reporting periods to prepare financial reports to the interested parties or shareholders in order to evaluate the financial performance of institutions

The monetary unit

Is acceptable to be used as one of the main assumption, as financial accounting uses as a given currency as a common denominator.

This will assist the users to usefully evaluate the financial performance and position during a specific.

ACCOUNTING RECOGNITION: Accounting recognition refers to recording the basic

elements of the financial statements The concepts of accounting recognition define the basic

principles that determine the timing of revenue, expense, gain and loss recognition in the entity’s income statement.

Example: AAOIFI’s SFA 2: Revenues should be recognized when realized.

Realization of revenues shall take place when one of 3 conditions met: The entity has the right to receive the revenue There is an obligation on the part of another party to remit The amount of revenue should be known and collectible with

reasonable degree of certainty

ACCOUNTING MEASUREMENT:

The conventional accounting measurement is based on the cost principle that considers the acquisition cost or historical cost as appropriate measurement basis

In case of zakat determination, majority scholars recommended the use of current prices on the due date of zakat.

The argument for use of current market value has been based on the needs for the most accurate valuation of wealth to be subjected for zakat in order to serve justice to both the zakat recipients and zakat payers

ACCOUNTING DISCLOSURE:

The objectives of accounting disclosure for an Islamic firm: Specific requirements laid down by Shari’ah for the firm to avoid riba’

and pay zakat Inferred general requirements which can be referred to as “social

accountability” and “full disclosure”