AN ISLAMIC PERSPECTIVE OF ACCOUNTING: Introduction and overview

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. 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 Shariah and delivering on its socioeconomic objectives. 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. Operations Islamic Accounting In operational, it performs eveythins within the limits of Islamic Shariah. Conventional Accounting In operational, it allows everything to achieve maximum profit Nature Islamic Accounting It is conceptualized based on the Islamic principles Conventional Accounting It is conceptualized based on principles of secularism and capitalism Governance Islamic Accounting It is governed by Al-Quran and Sunnah or Islamic Shariah Conventional Accounting It is govern by Accounting and commercial law and Secular Ethics Orientation Islamic Accounting It is always society or community oriented

Conventional Accounting It is always firm or individual oriented Equity Concept Islamic Accounting Firm does not have separate financial obligation Conventional Accounting Firm and Owner have separate entity and financial obligation Cost or Price Islamic Accounting Market or Selling price rather than Historical cost is preferred Conventional Accounting Historical cost rather that Market price is preferred Disclosure Islamic Accounting Full disclosure to satisfy any reasonable demand for information in accordance with the Shariah Conventional Accounting Limited disclosure provision of information subject to public interest Unit of Measurement Islamic Accounting Quantity based and monetary based (Zakat calculation) Conventional Accounting Monetary value based Accounting Period Islamic Accounting One lunar year for Zakat calculation Conventional Accounting Periodical measurement of performance Equity Islamic Accounting Recognize each party equally Conventional Accounting Survival of the fittest Profit Islamic Accounting Determine accurate and reasonable profit Conventional Accounting Tries to maximize profit Ownership Islamic Accounting It recognizes relative ownership on assets

Conventional Accounting It recognizes absolute ownership on assets and firm Accountability Islamic Accounting Public accountability focusing on the community who participate in exploiting resources Conventional Accounting Personal accountability focusing on individuals who control resources Conservatism Islamic Accounting Most favorable to society (justice) Conventional Accounting Most favorable impact on owners and least favorable to society Consistency Islamic Accounting Consistency based on Shariah Conventional Accounting consistency based on GAAP 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 Objectives of Financial Statement Balance Sheet Income Statement Cash Flow Equity Statement Islamic Financial Trust and Obligations Fulfillment of Faith Cash Entrusted Wealth Entrusted Traditional Financial Position Economic Performance Cash Position Wealth Ownership

Features of Islamic Accounting No different in terms of recording (double entry system) Clear distinction of Accounting Objectives i.e. religious obligation vs. commercial obligation (different significance of financial statements) Different users information need (legitimate and equitable transactions and wealth vs. maximization of wealth and economic consequences)

Compliance with the principles and rules of Syariah Different Islamic contractual relationships (mudarabah instrument; murabahah etc.) Distinct accountability relationships (to Allah SWT and Ummah) Determination of Zakat

User Groups of Accounting Information for Islamic Banks Investors (potential and existing) (lawful and equitable investment) Creditors (potential and existing) (lawful trade assets) Regulators Syariah Supervisory Board and Advisory Council ( syariah compliance) Customers (lawful goods and services) Others who may be effected by the disclosure or non-disclosure of information General layout of Islamic Financial Statements (Islamic Bank) Statement of Financial Position Income Statement Cash Flow Statement Statement of Changes in Equity Statement of Sources and Uses of Good Faith Qard Fund Statement of Sources and Uses of Zakah and Charity Fund Disclosure Statement of Financial Position Assets Cash and cash equivalent Receivables (Murabaha, Salam, Istisnaa) Investment securities Mudarabah investment

Musharakah investment Investment in other entities Inventories 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 Liabilities Current accounts, saving accounts and other accounts with separate disclosure of each category Deposits of other banks Salam Payable Istisnaa Payable Declared but undistributed profits Zakah and taxes payable Other accounts payable Unrestricted investment account Financial Institutions investment accounts Customers investment accounts Equity Share capital Treasury shares Share premium Reserves Proposed appropriations

Income Statement Revenues and gains from investment (-) Expenses and losses from investments Income (loss) from investments (-) Share of unrestricted investment account holders in income (loss) from investments before the banks share as Mudarib (=) The banks share in income (loss) from investments (+) The banks share in unrestricted investment income as Mudarib (+) The banks share in restricted investment profit as Mudarib (+) The banks fixed fee as an investment agent for restricted investment (=/-) Other revenues, expenses, gains and losses (-) General and administrative expenses (=) Net income (loss) before Zakah and taxes (-) Zakah and taxes (separate disclosure) (=) Net income (loss) Financial statement for changes in restricted investment Restricted investments are not assets of the Islamic bank and should not be reflected in the banks statement of financial positon. The bank does not have the right to use or dispose of these investment except within the conditions of the contract between the bank and holders of these accounts. The statement must show deposits and withdrawals by holders of restricted investments and their equivalent as of a given date. Statement of sources and uses of funds in the Zakah and Charity Fund Zakah A fixed obligation calculated by reference to net assets that have appreciated or have the capacity to appreciate over a specified period of time except for assets acquired for consumption or used in production For Limited liability Company Zakah should be based on the companys net assets, and the total amount be divided between owners.

Bank as an agent of Zakah Disclosure The period covered by the statement Banks responsibility for the payment of Zakah on behalf of owners of unrestricted investment accounts and their equivalents. Payments and uses of funds during the period and available funds at the end of the period