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 Gods 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, Allahs inspired acts, description of the conduct of the prophets 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 Allahs 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 Allahs 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 ones 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 Shariah 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 Quran (Islamic law, As-Sunnah) Full disclosure (to satisfy any reasonable demand for information in accordance with the Sharia) 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 Quran & 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 weeks class discussion: Please prepare answers for questions in text book page 21; Q1.1 Q1.3 Q1.4

Many thanks for your attention

WASSALAM