Islamic Accounting

Methodology
Compiled By
Dr. Hussien Shehata
Prof. of Accounting
Al-Azhar ni!ersity
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In The Name Of ALLAH The Most Beneficien The Most Merciful
Read : In name of the LORD, who created,
Created man from a clot,
Read, and the LORD is Most Bountiful,
!ho teaches " the #en,
Teaches man that which he $new he $new not%

3
IN TH& NAM& O' ALLAH, TH& MO(T )RACIO*(
TH& MO(T M&RCI'*L
!RITIN) 'INANCIAL TRAN(ACTION( IN TH& HOL+ ,*RAN
(Accounting Thought in Quran)
O, you who believe, when you deal with each other, in
transactions involving future obligation in a fixed period of
time, record them to writing.
Let a scriber (a book keeper) writes down faithfully as
between the parties. The scriber does not refuse to write
as god has taught him. So let him write. Let him who
incurs the liability dictate. But let him fear his lord and
not diminish any thing of what he owes.
!f the party liable is mentally deficient or weak or
unable to dictate let his guardian dictate faithfully.
And let two witnesses out of your own men and if
there are not two men then a man and two women such
as you choose for witnesses so that if one of them errs
the errs the other can remind her. The witness should not
refuse when they are called on.
4
"isdain not to record to writing for a future period
whether it be small or big# it is $ester in the sight of Allah
more suitable as e%idence and more con%enient to pre%ent
doubts among yoursel%es &&&&&&&&&.
So fear Allah for it is Allah that teaches you and
Allah is well ac'uainted with all things. (AL(Bakkara )
%erse *o. +,+).

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Chapter THREE
ACCOUNTING IN ISLAMIC METHODOLOGY
CONTENTS
Preface
- Meaning of Accounting in Islamic Methodology.
- "#$ecti!es of Accounting in Islamic Methodology.
- %eatures of Accounting in Islamic Methodology.
- %eatures of Accounting in Islamic Methodology.
- Classification of Accounting in Islamic Methodology.
- Principles of Accounting in Islamic Methodology.
- Accounting for Capital in Islamic Methodology.
- Accounting for Profit in Islamic Methodology.
- Accounting for &a'ah.
6
-R&'AC&
Moslems certainly believe that, Islam is a way of life, it
is a believe, jurisprudence, a state, strength, a sward, etc. It is
a whole system.
hey also believe that Islamic jurisprudence is universal
for all man!ind, perfect and comprehensive for all things and
affairs, permanent for all times and indivisible and
inseparable. It should be applied as a whole system. "llah
says# $e have neglected nothing in the boo!% &"l'"naam' ()* .

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Islamic as a whole system, consists of a set of sub'
systems which integrate and act together to achieve spiritual
and secular satisfaction for man!ind. he Islamic economic
system is a sub'system.
his note'boo! is mainly concerned with the Islamic
"ccounting +ystem &"ccounting in Islamic Methodology*. It is
intended to through some'light upon its meaning, concepts,
features, principles and application.
7
he main purpose of this note'boo! is to provide the
reader with a proper insight into accounting in Islamic
methodology as a system, and how it is capable to apply in
real life at all times and in all places.
I have done my best to ma!e the selected topics of this
note'boo! very easy to follow and to understand, so as to be
of great help for accountants.
$e should always remember that, "llah is the most all
!nowing .... ,e glorified - we have no !nowledge except that
which you has tought us%. han!s and praise be to "llah.
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Dr. Hussien Shehata
Prof. of Accounting
Al-Azhar ni!ersity
8
M&ANIN) O' ACCO*NTIN) IN I(LAMIC
M&THODOLO)+
Meanin. of Accountin. in Ara"ic Dictionaries
he world accounting in Islam has many meanings
according to the situation where it is mentioned and used.
In "rabic dictionaries it refers to# count and record the
financial actions and transactions. "lso, it refers to
accountability and responsibility by the manself or by others.
Meanin. of Accountin. in the Hol ,uran
In the .oly /uran, the word "ccounting refers to many
meanings such as#
/012 Accounta"ilit: "llah says#.. 0eople who
opposed the command of their 1od and his apostles. 2id we
call to account, to a severe account% &"ttala3 )*.

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In another verse, "llah has said, hen who is given his
record in his right hand, soon will his account be ta!en by an
easy rec!oning%.

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/312 Countless: "llah says# "nd that you may !now the
number and count of the years4% &"l'Israa '56*

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/412 Rec$onin.: "llah says# Our lord cover with the
forgiveness, me and my parents and all believers on the
day that the rec!oning will be established%. &7brahim ' 85*

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/512 Measurement: "llah says# 9ord betows .is
abundance without measure on whom .e will%, &"l',a!ara
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Meanin. of Accountin. in the Teachin.s of the
-ro#het Mohammed /-"uh16
In the teachings and traditions of the prophet
Mohammed &0buh.*, the word "ccounting has the same
meaning in the .oly /uran, mentioned before.
)eneral Meanin. of Accountin. in Islam
It is concluded from the previous concepts that the
general meaning of accounting in Islam refers to the
operations of recording, countness and measurement of
transactions and dealings for discussion, accountability and
setting down reword.
10
Meanin. of Accountin. in Islamic Dealin.s and
Business
In the financial context, the word accounting in Islam,
refers to the operations of recording, countness,
measurement of financial dealings, within Islamic
jurisprudence to provide useful, right, timely trust and fair
information for decision'ma!ing.
"llah says# O you who believe, when you deal with each
other in transactions, involving future obligation in a fixed
period of time, record them to writing. 9et a scriber writes
down faithfully, as between the parties. he scriber dose not
refuse to write as 1od has taught him. +o let him write,. 9et
him who incars the liability dictate. ,ut, let him fear his 9ord
and not diminish anything of what he owes%. &"9',a!!ara
verse :o. 6)6*.

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OB7&CTI8&( O' ACCO*NTIN) IN I(LAMIC
M&THODOLO)+
he Main Objectives of "ccounting in Islamic Methodology
"re#
&5* 0rotecting funds intact, and declaring the ownership of all
parties. $ithout writing &recording* transactions, we can
not count the credit ness and debit ness, "llah has made
writing compolatory, .e says# O you who believe, when
you deal with each other in transactions involving future
obligations in a fixed period of time record it in writing%
&"9',a!arah ' 6)6*.

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&6* "scertaining justice, and more convenient to prevent
doubts. "llah says# ,e not averse to writing down
whether it be small or great with the term thereof. hat is
more e3uitable in the sight of "llah, and more sure for
testimony and the best way of avoiding doubt between
you%. &"9',a!!ara ' 6)6*.
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&(* .elping in judgment between dealers. he judgeman
depends mainly on which is written down in records when
he ma!es decisions. "s it is mentioned above "llah
says4 4 more sure for testimony% means it is a good
and suitable evidence.
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&8* .elping in ascertaining the results of business during a
certain period of time, profit or loss,.
&;* <ounting up the amount of =a!ah due at its time, and its
distribution, between whom due.
&>* 2etermining the ownership of parteners in Islamic
companies according to Islamic jurisprudence articles
and rules.
13
'&AT*R&( O' ACCO*NTIN) IN I(LAMIC
M&THODOLO)+
"ccounting in Islam has some features which speciali=e it
from the traditional accounting. "mongst these features
are the following#
&5* It is based on the ,elieve 7thics such as the believe that
"llah is only owner of all things, the believe in the day
after for accountability in front of "llah.
&6* It is based on Morals# such as# "llah fearing, honesty,
trust, !eep'promises, co'operation, forgiveness. In this
context, "llah says# "llah commands justice, the doing
good and giving to !insfol! and he forbids all shameful
deeds and injustice and receive admonition% &"9':ahl ' ?@*.
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&(* "ccounting principles are conducted from the sources of
Islamic jurisprudence such as the .oly /uran and sonna .
hese principles are perfect, permanent and
comprehensive.
&8* "ccounting in Islam deals only with lawful transactions,
and avoids evil and unlawful dealings.
14
&;* "ccounting in Islam does tress on the behavioral aspects
of the man!ind wor!ing in the enterprise and motivates
and incentives him towards straight path, according to
Islamic jurisprudence.
&>* "ccounting framewor! in Islam is wider, it implies spiritual
and secular aspects, it is applicable to the whole life.
15
CLA((I'ICATION O' ACCO*NTIN) IN
I(LAMIC M&THODOLO)+
"ccounting in Islam is clarified into two concepts.
hey are# "ccountability and financial "ccounting. he
following is a brief insight on each one.
Accounta"ilit#
It means as!ing some body about what he done, it is
classified into#
&5* +elf ' "ccountability and "ccountability by others.
&6* "ccountability in this world and "ccountability in the
day after.
'inancial Accountin.#
It means recording, countness and presenting information
business. In the context of financial affairs and dealings
accounting systems can be classified into#
&5* single establishment "ccounting system.
&6* <ompanies "ccounting system.
&(* 1overnmental &<orporate* "ccounting system.
&8* :on'profit organi=ations "ccounting system.
&;* Inheritance "ccounting system.
&>* Aa!ah "ccounting system
and so on .
16
-RINCI-L&( O' ACCO*NTIN) IN I(LAMIC
M&THODOLO)+
Definition of 'inancial Accountin. -rinci#les#
"ccounting in Islam as a science is based on a set of
principles which govern the accountant in his job. hese
principles are deduced from the sources of Islamic
jurisprudence and from traditions as far they do not oppose the
rules of the Islamic jurisprudence. +ome of these principle may
be similar to those applied in the contemporary accounting, but
they has evidences from the Islamic juridical literatures .
-rinci#les of Accountin. in Islamic Methodolo.
he main principles of accounting in the Islam as
methodology are#
&5* +eparate financial status of the enterprise.
&6* 1oing concern. &continuity*.
&(* "9'.awliah financial year. &periodicity*.
&8* Immediate writing down transactions.
&;* $itnesses by any faith mean &objectivity*.
&>* /uantitative and monetary measurement.
&1olden or silver units*.
&Monetary values*.
&B* Caluation according to current &Mar!et* value.
17
&)* Matching between financial position of periods or or
between earnings and expenses.
&?* 2istinguish between# profit, subsidaries earnings and
capital profit.
&5@* 2isclosure.
18
ACCO*NTIN) 'OR CA-ITAL IN I(LAMIC
M&THODOLO)+
Classification of -ro#erties in Islamic Methodolo.#
0roperties &funds* are classified in Islamic jurisprudence
into#
&5* Monetary properties# such as# golden and selver money
ban!note, and mineral money.
&6* :on' Monetary properties# hey called in DI/. urudh
they are two !inds.
&a* <ommercial urudh &wor!ing capital*.
&d* Eeep for use urudh &fixed assets*.
Ca#ital definition in Islamic Methodolo.:
"ccording to the previous classification, the capital refers
to properties intended to finance the activity at the begening. It
may be monetary properties or non'monetory properties.
Ca#ital Measurement in Islamic 7uris#rudence:
<apital is measured in Islamic jurisprudence according to
the following e3uations#
&a* "t he begening of the activity#
<apital F Monetary properties of the activity.
&d* "t he end of the financial year#
19
<apital F 0roperties 9iabilities
F Monetary properties G non'monetary properties
Ca#ital (tatement in Islamic Methodolo.:
he previous e3uations can be represented as shown in
the following statement.
20
Ca#ital (tatement
at the end of the ear 9
Items Amount Amount
-ro#erties:
' Monetary Dunds.

' :on'monetary funds for dealing.

&Hrudh "9'ijorah*

' :on'monetary funds for using.

&Dixed "ssets* &Hrudh 79'/unyah*

' :on'monetary funds Intangible.
otal 0roperties
9ess
9iabilities
' 9ong'term liabilities# such as long
term loans.

' +hort'term liabilities# such as

creditors due amounts.

otal 9iabilities
<apital &73uity or net worth*
21
ACCO*NTIN) 'OR -RO'IT IN I(LAMIC
M&THODOLO)+
-rofit Definition in Islamic Methodolo.#
0rofit refers in "rabic literatures to the increase or growth in
properties &wealth* committed for dealings during a fixed
period in time.
It is mentioned in the .oly /uran only once in ba!!ara soarah,
"llah says# hese &he hypocrites* are they who have
bartered &changed* guidance for error, but their trade is
profitless and they have lost true direction% &"9',a!!arah ' 5>* .
his verse refers to the loss of the hypocrites.
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0rophet Mohammed &0,H..* says# he believer seems
li!e the business man, we connot say that, he has gained
profit unless, his capital is not said that the believer had got
reword for nawaafit, until, his Draied are completed%.
Islamic school and jurists define profit as the growth in
wealth raised from its turn'over in dealings during a fixed
period of time.
ypes of growth &":M""* in $ealth in Islamic
Methodolo.#
22
In Islamic juridical literatures, the scholars and jurists
distinguish between three types of growth in wealth# hese
types are#
&a* <ommercial profit, which refers to the increase in
commercial wealth committed for trade during a fixed period
in time due to turnover and ris!.
&b* Iield from urudh at tigarah &"9'1alla* which refers to
the increase in commercial commodities &Hrudh "l'ijarah*,
before selling, such as the wool raised from sheepJs ready for
trading. &subsidiaries earning*.
&c* :et earnings from urudh al 3unyoh# &"9'Dayda*, which
refers to earnings from capital assets such as the mil!
generated from animals speciali=ed for use in the activity.
23
-rofit mar.in Criterion in Islamic Methodolo.#
he profit margin in Islamic jurisprudence determined by
a set of criterion, amongst them are the following#
&5* ,elieve articles &modes*.
&6* Morals modes.
&(* ,alance between high profit and low profit.
&8* ,alance between profit and ris!.
&;* urnover rate.
&>* +elling and payment policies.
&B* he importance of commodity.
.owever, the buyer should follow the general Islamic
jurisprudence articles when he buys or sells, in an Islamic
mar!et clean from, lewdness, abomination, wic!edness,
falsehood, disloyalty, brea!ing of promises, false testimony,
false accusation4 etc.
-rinci#les of Calculatin. -rofit in Islamic Methodolo.#
he main accounting principles which govern the
calculating of profit in the Islamic jurisprudence are#
&5* Matching principle.
&6* <apital intact.
&(* Keali=ation of profit by production.
&8* Caluation on the base of current &mar!et* value.
24
&;* urnover of capital.
&>* Kis! factors.
&B* Other general principles which do not oppose the
Islamic jurisprudence articles.
Methods of Calculatin. -rofit in Islamic Methodolo.#
here is no uni3ue method for calculating the profit in
Islamic methodology, but there are many methods, of them
may be similar to those contemporary accounting methods.
"mongst these methods are the following#
&5* 1rowth in wealth.
0rofit F wealth at the begening of the period wealth
at the end of the period.
&6* Matching between e3uity at the begening of the period
and the e3uity at the end of the period.
&(* Matching between earnings and expenses during a
fixed period of time.
0rofit F 7arnings 7xpenses.
here is no restrictions on using any method or
techni3ue for measuring profit in Islam as far as it does not
oppose the Islamic jurisprodence articles.
-rofit Account accordin. to the Islamic Methodolo.:
25
1rowth &:amaa* in properties is divided into three types.
hey are# <ommercial profit, "9'1alla and "9'Daida.
"ccordingly the profit account is formulated in two stages,
the first stage shows the commercial profit, and the second
stage shows the galla and "9'Daieda. hese stages are
shown as follow.
26
-rofit Account
/'irst (ta.e1
Opening +toc!

+ales Kevenue

0urchases

0urchases 7xp.

<losing
+toc!

+ales 7xp.

"dm. 7xp.

:et <ommercial

0rofit

)rowth /Namma1 Account

/second (ta.e1
':et <ommercial 0rofit

otal 1rowth

' "9'1alla

&otal 0rofit* ' "9'Daieda

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CHA-T&R /51
:A;AH ACCO*NTIN)
Contents
- Preface.
- (ssentials of &a'ah.
- &a'a-ta#le Properties.
- )on-za'a-ta#le Properties.
- &a'ah Calculating
- Calculating &a'ah for Different properties.
- &a'ah Calculating Statement.
- &a'ah *ecei!ers +Duers,.
- &a'ah %unds Statement.
28
Cha#ter 'O*R
ACCO*NTIN) 'OR :A;AH
-reface#
he main purpose of this chapter is to help in understanding,
calculating and implementing =a!ah within Islamic
jurisprudence LDI/. 79'AE"."M. $e draw heavily on our
boo!#, "ccounting for Aa!ah, which is written in "rabic
language.
:a$ah Meanin.
Aa!ah is the third pillar of Islam. It purifies Muslims from evils.
It is a certain amount of properties paid at a certain time to
whom due accounting to Islamic jurisprudence of =a!ah.
:a$ah Baer: who worth that is higher than the minimum
exempted amount of funds, which is called :I+",.
The :a$ah Duer: who receives Aa!ah such as the poor, the
needy and so on whom mentioned in the .oly /uran. "llah
says# "lms are for the poor and needly, and those employed
to administrate the funds of =a!ah, for those whose hearts
have been recently reconciled to truth, for those in bondage
and in debt, in the cause of 1od, and for the wayfarer,. hus
29
is it ordained by 1od. "nd is full of !nowledge and wisdom%.
&"9'auba >@*.

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:a$ah Administrator: who carries out the collection and
distribution of Aa!ah. hey wor! at Aa!ah funds institutions.
Nisa" of :a$ah: It is the minimum amount that indicates
the Aa!atability. $ho owns :isab is a Aa!ah 0ayer on all that
he owns. It is e3uivalent in the case on monetory properties
and commercial activities of ); grame of pure gold. &) aunces
of gold*.
:a$ah +ear: It is a full hegria year. It starts from the day the
net worth reaches :isab except agricultural output, Aa!ah
must be paid every year on the net wealth as it reaches :isab.
< :a$ata"le -ro#erties:
Aa!ah 0roperties &Dunds "ssets* are which meet the
conditions of obligatory Aa!ah.
hey are as follows#
&5* It should be a full ownership.
&6* It should be actually growing or anumed growing.
30
&(* he completion of the year, except agriculture products
and minerals in the earth which is paid at the day of receiving.
&8* :et properties +hould reach amount of :isab.
&;* 0roperties should abound ,asic :eeds.
&>* properties should not include due 2ebts.
&B* 0roperties should be earned from .alal and tayeb.
Einds of Aa!atable 0roperties
he main !ind of =a!atable properties are#
N <ash and financial investments.
N <ommercial properties.
N <attle properties.
N "griculture and Druits products.
N Mineral and Marine wealth.
N Kevenue from renting Dixed "ssets.
N Kevenue from wor! and Dree lance professions.
Non=:a$ata"le -ro#erties:
"ny !ind of wealth is Aa!atable items except the following#
N 0ersonal itemsO such as personal cars, family clothes.
N .ouse ' .old items such as furniture, e3uipment.
N Dixed assets for use.
N Pewelry within the customary level.
31
N .ouses for residence.
N $ealth under :isab.
N ,ad 2ebts.

:a$ah Calculation:
he following are some examples on calcutating Aa!ah
< :a$ah on monetor wealth#
such as.
' <ash in +aving account.
' <ash in <hec!ing account.
' <ash in ,an! deposit account.
' <ash in 0ass account boo!.
' +aving <ertificates.
' +ecurities and ,onds.
he rate &ratio* of Aa!ah on monetary items is 6.;Q as the
fund reaches :isab. It is a yearly due.

< :a$ah on Business !ealth (-rud AL(Ti$arah)
Aa!ah is due on net wor!ing capital which is calculated
as follow#
:et wor!ing capital F current assets current liabilities.
32
he rate &ratio* of =a!ah on business properties is 6.;Q as the
net wor!ing capital reaches :isab. It is a yearly due.
< :a$ah on A.ricultural #roducts# such as#
$heat, rice, vegetable, fruits, cotton, rubber, bean, 4 It
is calculated on harvest day as the value of gross crop
reaches nisab which is e3ual to >(; !ilos of wheat, corn 4 or
similar products.
he =a!ah ratio is 5@Q if the land is watered by rain or
rivers &without <ost*, and ;Q if the land is irrigated by men or
mechanically. his =a!ah is due on harvest day.
< :a$ah on Cattle !ealth /AL=Anaam1.
+uch as meat'cattle, buffalo, camels, poultry 4 etc. It is
calculated on the 3uantity including small and big all
together, as they reached :isab. here are =a!ah schedules
for each !ind of cattle wealth which indicate the =a!ah ratio
and :I+",.
33
< :a$ah (tatement.
Aa!ah can be calculated and diclaired through out a
statement which is formulated according to the type of =a!ah.
he following is an example of a =a!ah statement for
,usiness wealth.
34
:a$ah Calculation statement
'or the ear ended > >
No6 Items Amount Amount
:a$ata"le -ro#erties
' +toc!s

' 2ebtors

' Keceivable <ommercial 0apers

' +ecurities

' <ash at ban!

' <ash on hand

Total :a$ata"le -ro#erties

Less
Current Lia"ilities
' <reditors

' 0ayable <ommercial 0apers

' ,an! Overdraft

Net :a$ata"le -ro#erties

Aa!atable amount F :. A0 6.;Q
Katio of =a!ah 6.;Q
:a$ah Recei?ers /Duers1:
Aa!ah is given to the followingO according to the .oly
/uran#
&5* he poor.
&6* he needly.
&(* 7mployees to administrative the funds of =a!ah.
&8* $hose hearts have been recently.
&;* hose in bondage.
&>* hose in debt.
35
&B* In the cause of 1od.
&)* he way farer.
:a$ah 'unds (tatement:
"t the end of the financial year, he accountant prepass
the following statement for Aa!ah Dund, institution.
&5* Kevenues and 7xpenditures +tatement of the Aa!ah
fund.
&6* he financial +tatement of the Aa!ah Dund.
"t the following pages a very simple model for each.
36
Re?enues and &@#enditures (tatement
of :a$ah 'und for the ear endin.
Items Amount Amount
Re?enues of :a$ah
' Aa!ah on Monetory wealth
' Aa!ah on ,usiness wealth
' Aa!ah on "gricultural 0roducts
' Aa!ah on <attle $ealth and Ke!a=
' Aa!ah on Dixed "ssets yield
' Aa!ah on 0eronJs wor! income such as
wages, salaries and rewards

Total Re?enues
&@#enditures of :a$ah
' 0oor and :eedly Individuals
' Mos3ues and <harity +ocieties
' 1eneral and Managerial 7xpenditures
' :ew <onverts &Muallafa*
' o Dree +lavers &"9'Kigab*
' Dor hose in 2ebt
' Dor he cause of "llah
' Dor ravelers
Total &@#enditures
(ur#lus or Deficit of Aa$ah fund
37
'inancial (tatement :a$ah 'und
as at > > H
9iabilities "mount 0roperties "mount
N "ccumulated Aa!ah surplus

N <ash in .and

N Aa!ah 2ue

N <ash at ,an!

N 7xpenditure 2ue

N Aa!atable Investments

N angible Aa!ah funds

N Dixed "ssets

otal

otal

38