ACCOUNTING FOR

ISLAMIC BANKS
ACCOUNTING FOR MUSHARAKAH
FINANCING

ISLAMIC COMMERCIAL TRANSACTIONS

Gratuitous
Contracts
Gift

Trading
Contracts
Leasing

Sale

Waqf
Loan

Operational
Lease
Operating
Lease +
Transfer of
Ownership

Investment
Contracts

BBA

Musharakah
Mudharabah

Murabahah
Salam
Istisna etc.

Musharakah
FAS 4 : A partnership between the Islamic
bank and its clients, where both parties:
Contribute equal or varying amounts of
capital to establish a new project or share in
an existing one;
Capital can be on permanent or declining
(capital) basis and will have his due share of
profits; and,
Partners share proportionate losses
according to the capital contribution and not
other wise.
3

Competent contracting
parties
The capital shall be in
cash, gold or silver or
equivalent; realty
(goods, real estates
machines); or
intangible rights (e.g.
patents) or equivalents
The partner does not
guarantee another
partners capital or
funds except in case of
negligence or omission.

Any exchange or sale of

capital to the other
partner should not be at
historical cost but at the
fair value at the time of
sale.
Profits can vary with the
agreement and capital
contribution and to be
distributed upon
completion.
Loss to be shared
according to capital
contribution (credit
guarantee) and can be
carried forward or offset.

Illustration
Customer/
Partner
RM100,000

Islamic bank
RM200,000

Investment
PSR
50:50

Profits
RM30,000
Losses
RM20,000

Profits
RM60,000

Losses
RM40,000

Losses
RM60,000

Profits
RM30,000

 Constant

Musharakah:

the partners share in Musharakah

capital remains (constant) throughout its
period

Musharakah Diminishing to
Ownership:

one party has the right to purchase a

part of the other partys share which
declines until one becomes the sole
proprietor of all capital (Musharakah
Mutanaqisah)
6

Constant CCR or PSR?

Recognition &
Measurement
Upon receipt or
deposited in a
Musharakah Account
known as Musharakah
Financing.
Constant Musharakah
capital:
the capital at the end of
period is measured
based on historical cost.

Diminishing
Musharakah capital:
measured at historical
cost after excluding
the sold portion (fair
value) is the basis of
measurement.
Any difference
between fair value and
historical cost is the
banks profit or loss
Upon termination:
Outstanding capital
becomes receivable.

JOURNAL ENTRIES
Transactions

DR

CR

Payment of Financing to
customers/partners

Musharakah
Financing

Cash

Repayment from customers/partners

Cash

Musharakah
Financing

Profit received from Musharakah

Financing

Cash

P&L

Losses on Musharakah Financing

P&L

Musharakah
Financing

Sale of banks share in a diminishing

musharakah
Profits
Losses

Cash

Musharakah
Financing
P&L (Profits)

Amount outstanding from partner at

settlement

Cash Receivable

P&L (Losses)
Musharakah
Financing

Balance Sheet
Musharaka Financing *
Less :
Provision for loss in Musharaka Financing
(XX)
Net Musharaka Financing
XX
Jointly or Self Finance Assets
Income Statement
Musharaka Income (Losses)
Sale of Capital (Profits/(Losses))

XX

XX
10