Accounting Systems

Accounting Systems
Islamic Accounting Defined:
The branch of accounting which sets its goals and performs all of its activities to achieve those goals ethically and objectively within the limits and boundary of Islamic Shariah is called Islamic Accounting. According to Hameed (1), Islamic Accounting may 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 to evaluate their own accountabili-ties to Allah. by the Halals (Allowed) and Harams (Forbidden) in Islam. Interestbased traditional accounting do not reveal appropriate value of assets in the Balance Sheet for determining accurate amount of Zakat, the compulsory yearly payment by the rich to the poor. Undue cost controlling and cost reduction techniques in traditional accounting sometimes lead to unjust and inhuman behavior to the employees of the organization, which is forbidden (Haram) in Islam (Shahul-2). Therefore, to avoid these sorts of accounting practices and to comply with the principles of Quran and Sunnah, it is essential to follow Islamic accounting in the Muslim world and Islamic organization replacing current traditional or conventional accounting. 3. Alternative Accounting system for Islamic Organizations: At present, thousands of various Islamic organizations including business organizations such as bank, insurance and investment companies are operating with specific Islamic objectives. But their use of interest-based traditional accounting in these organizations is not fully compatible with these Islamic objectives. Islamic accounting will be more appropriate to achieve the socio-economic and religious objectives of Islamic institutions and Muslim users (Shahul, 2001). 4. Contradiction between Traditional Accounting and Islamic Principles: The basis of Islamic accounting is profit while the basis of traditional accounting is interest which is completely Haram (forbidden) in Islam (Al-Quran, 2:278 & 2:279). Like interest, the futures and options, short sale, preferred stock, interest-based modern investment modes related transactions are also practiced in traditional accounting which is in sharp contrasts with the Islamic principles (Shahul-2). Traditional accounting is also unable to avoid and control misappropriation of wealth and power and also unsocial behavior of the dominating businessmen or companies (Gray et. al, 1988). Hence, to avoid these undesirable activities and transactions accounting conceptions on the principles of Islamic Shariah through Islamic accounting is a must. 5. Islamization of knowledge: Islam, a way of life directed by Allah (SWT), is compatible with the nature of the people and also a source of happiness in this earth and also hereafter (Al-Quran, 2:201). After experiencing the difficulties and sufferings of capitalism, socialism and communism, the people are now returning to their natural way of life through Islam (Shahul2). To accomplish all the activities (including social, political, cultural, legal and educational activities, etc.) in the way of Islam, it is now required to redefine, restructure the available knowledge and also develop new knowledge based on Islamic norms and principles. At present there is movement towards Islamization of knowledge and disciplines (IIIT, 1988). Therefore, accounting is also necessary to be developed based on Islamic principles for implementing justice to all, for equitable distribution of wealth and providing accurate information to the people in the society (Al-Quran, 4:122). (Maintenance of Public Interest), and avoidance of the Riba (Avoidance of Interest), Ihtikaar (Avoidance of Hoarding), Zulm (Avoidance of Tyranny), Hirs (Avoidance of Greed), Israf (Avoidance of Extravagance) (Lewis, 2006). Keeping in view these postulates of Islamic accounting, the authors, in the following paras, endeavour to analyze the existing concepts of traditional accounting in the perspective Islamic accounting. 1. Entity Concept: The entity concept states that the firm and its owners are separate entities and one firm is separate from another firm. Therefore, the owners (in some cases) are not liable for the liabilities of the firms. Hence, Islamic Shariah disagrees with the concept because the owners are not liable for the companys debt at the time of bankruptcy but have the rights to residual profits which is unlawful and similar to gambling (Napier, 2007). Some others accepted the concept as at the early age of Islamic State there were Mosques or Baitul-Mal with separate financial status and (Abdul-Rahman, 1996 and AAOIFI, 1999). However, in Islamic accounting, if the owners become bankrupt, then the liabilities may be distributed to their successors or legal inheritors, and, it will be better for the owners because he will be asked for it in hereafter (Al-Quran, 23:115). As per the survey result, 85% of the respondents agreed to accept the entity concept as a concept of Islamic accounting and 10% of the respondents disagreed in this regard (See Appendix-2). Hence, entity concept may be taken as a concept of Islamic accounting. 2. Going Concern Concept: According to this concept it is assumed that the business will continue for indefinite period of time and therefore the accountants show acquisition of any fixed assets as cost but not as the expense of that period. In Islamic view, only the Allah will exist indefinitely, so it cannot be accepted in Islamic accounting. It is possible to avoid this conflict if we say that final and permanent existence is true only for Allah (SWTA) and a business organization will continue indefinitely (if Allah wishes). We know, Mudaraba contract, which is also for specific period, but assumed to continue until one or all of the parties involved decide to terminate the contract (Al-Obji, 1996). Islam emphasizes the continuity of business activities because they are the source of Zakat, (to pay Zakat, business must continue) which is paid every year. As per the survey result, 80% of the respondents agreed to accept the going concern concept as a concept of Islamic accounting and 20% of the respondents disagreed in this regard (See Appendix2). Hence, going concern concept may be accepted as a concept of Islamic accounting. 3. Accounting Period Concept: The financial statements representing the financial performance and financial position of the business are periodically disclosed based on this concept. In Islamic points of view, this concept may be accepted based on the ground that Zakat is paid annually and conditions for applicability of Zakat is holding of assets for one year. Accounting statements should be prepared for a particular period, showing the amounts on which Zakat would be levied (Adnan and Gaffikin, 1997). Attiah (1989) noted that the budget of the Baitul-Mal was prepared on an annual basis, and the employees in the Islamic states were paid annually. 4. Money Measurement Concept: The money measurement concept states that the events recorded in accounting must be measurable in terms of money and it facilitates
The Cost and Management, November-December, 2009

Accounting Systems
to record the heterogeneous objects to be expressed in a common denominator. But the objects that cannot be expressed in terms of money are not recorded and the purchasing power of money is unstable in inflationary environment and it affects future financial rights and obligations. Therefore, the role of money as a standard of measure is questioned by different Islamic scholars. Ahmed (1990) stated that using money as a unit of measurement is questionable from Islamic perspective in an inflationary situation and hence money is unable to serve as a just and honest unit of account. But most of the scholars argued that because of unavailability of any suitable standard money can be taken as a standard of expressing diverse objects in a common denominator (Napier, 2007). In an interest-free economy money may be used in recording transactions without any question. Islamic accounting records and prepares reports relating to some transactions which may not be possible to measure in terms of money (for example, environmental damages/ degradation by the firm). As per the survey result, 85% of the respondents agreed to accept the money measurement concept as a concept of Islamic accounting and 15% of the respondents disagreed in this respect (See Appendix-2). Hence, money measurement concept may also be taken as a concept of Islamic accounting. 5. Cost Concept: According to this concept, the assets acquired should be recorded and stated in the financial statements at its cost because the cost amount is objective and verifiable. But for the purpose calculation of Zakat, the assets are required to be recorded at current market value. This is because the real (just and fair) picture of the organizations cannot be revealed with these misleading out dated figures. The cost concept for valuation corrupts the principle of disclosing the truth to the interested users (Al-Quran 2:42). On the other hand, if current value is used, then profit or dividend may be distributed among the stockholders before it is earned, that cannot be approved under Islamic system of accounting. As current value also creates some problems and because of non-availability of alternative way and therefore, this concept can be used in Islamic Accounting practices. Mirza and Baydoun (2000) suggest using both the valuation methods in Islamic Accounting, i.e., the contractual transactions with other parties should be based on cost and Zakat calculation (assets Valuation) should be based on current market value. Attiah (1989) stated that major four schools of Islamic thought agree upon this concept. As per our survey result, 70% of the respondents agreed to accept the cost concept as a concept of Islamic accounting but 30% of the respondents disagreed in this regard (See Appendix-2). Hence, the scholars should think over the matter. 6. Conservatism Concept: The basis of the concept is Anticipate for no profit but provide for all possible losses. It states that if the accountant has reasonable choice, accountant records assets and revenues at lower figures and liabilities and expenses at higher figures. It acts as a constraint to the presentation of relevant and reliable data (Belkaoui, 2000). This concept contradicts with Quran and Sunnah because it would lead to understatement of assets which is the basis of Zakat calculation. Ahmed (1990) stated that though this concept contradicts with Islamic Principles but it restricts overoptimistic valuations and distribution of unearned profit. Allah (SWTA) also asks Muslims to choose and follow medium paths avoiding the extremes (Al-Quran, 25:67 & 17:29). Therefore, justified market value (the current value of the largest trading market or average values of the larger
11

Accounting Systems
can be taken into account for accounting records. As per the survey result, 70% of the respondents agreed to accept the conservatism concept as a concept of Islamic accounting but 25% of the respondents disagreed in this regard (See Appendix-2). Hence, the scholars should think over the matter. 7. Full Disclosure Concept: The main purpose of accounting is to provide necessary information to the interested users for making decisions. According to this concept, all the information relating to the organization should be disclosed fairly and completely in the financial statements so that the intended users can understand the statements without any clarification from the accountants. So, traditional accounting emphasizes on users requirement of information while Islamic accounting emphasizes on accountability of the accountants in disclosing the information. Islam also gives emphasis on ethical disclosure as the accountability to the nation, because Allah (SWTA) knows every thing what we conceal and disclose (Al Quran, 14:38). -And nothing is hidden from your lord (so much as) the weight of an atom (or small ant) on the earth or in the heaven (Al-Quran 10:61). Not what is less than that or what is greater than that but is written in a clear record. (Al-Quran 18:49)---They will say: Woe to us! What sort of Book is this that leaves neither a small thing nor a big thing, but has recorded it with numbers!-- And they will find all that they did, placed before them, and your lord treats no one with injustice. Allah said (Al-Quran 2:42): Do not cover the truth with falsehood and do not conceal truth when you know it. Hence, this concept is fully compatible with the Islamic Shariah. 8. Materiality Concept: The accountant does not attempt to record a great many events which are so insignificant that recording of them in books is no at all justified by the usefulness of the result (Khan, 1995). In some cases it may be impossible to understand and present the statements in a convenient way if all the information is incorporated therein. But Islam always emphasizes on justice, and it may not be possible to maintain justice in presenting information if materiality concept is applied. The word material is a relative term and varies person to person and organization to organization. For maintaining justice Allah (SWTA) always emphasizes on full recording and disclosure (AlQuran, 99:7-8 and 50:18). In Islamic accounting, (where possible and easier) full disclosure of information is preferable, and (where not possible to present fully) materiality concept can be used if there is available safeguards against misuse or if accountants committee furnish a qualitative guidelines on the concept of materiality to arrive at the uniform practice (Islam, 2000). As per the survey result, 75% of the respondents agreed to accept the materiality concept as a concept of Islamic accounting, 10% of the respondents disagreed and 10% of the respondents were indifferent in this regard (See Appendix-2). Hence, materiality concept may be taken as a concept of Islamic accounting but should be used carefully. 9. Accrual Concept: As per accrual concept revenues are recognized and recorded in the books of account when it is generated, but not when it is received in cash and expenses are recognized and recorded in the books of account when it is incurred, but not when it is paid in cash (Khan, 1995). But application of this concept requires subjective judgment which may be biased and created doubts in account. In accrual basis of accounting, profits may be distributed collecting cash from other
12

Islamic Accounting Systems and Practices

Dr. Syed Mohammad Ather FCMA* Md. Hafij Ullah**

sources before collecting cash from that account which may turn into bad (Napier, 2007). Since Islam is based on truthfulness and accuracy, it seems that for Islamic Accounting the cash basis of accounting rather than the accrual basis of accounting will be more appropriate. As per the survey result, 85% of the respondents agreed to accept the accrual concept as a concept of Islamic accounting and 15% of the respondents disagreed in this respect (See Appendix-2). Hence, Accrual concept may be taken as a concept of Islamic accounting. 10. Other Concepts: There are some other concepts of accounting such as Dual Aspect, Matching, Reliability, Consistency, and Objectivity Concepts which are followed in recording and presenting the information to the interested users fairly, truly and appropriately. Though there are some different opinions regarding the acceptability of some of these concepts in Islamic accounting but none of these are conflicting with the basic principles of Islamic Shariah. For fair, clear, and appropriate recording and presentation of the information relating to the operating results and financial position of the organization, these concepts are sometimes compulsorily required in Islamic accounting. Therefore, these concepts may be accepted in practicing Islamic accounting. 9. Differences between Islamic Accounting and Traditional/ Conventional Accounting: Islamic Accounting and Traditional/Conventional Accounting have got differences in many points among which the basic ones have been highlighted in the following table. Points
1. Definition

Abstract: Allah (SWT) and His Messenger Mohammad (SAW) gave us guidelines regarding all aspects of our life to deal successfully in this earth and to get salvation in hereafter. Accounting is also an integral part of our life. This article gives us an introduction to Islamic Accounting and its contrast to Traditional Accounting. This article also identifies the basic features and objectives of Islamic Accounting, justifies the need for the development of a separate accounting system for the Islamic Organizations, and analyzes the traditional concepts of accounting in the Islamic point of view. The proposition of the article is that the role of accounting and accountants would be more accurate, effective, complete and fair if any firms and organizations follow Islamic accounting. Keywords: Islamic Accounting, Conventional Accounting, Islamic Shariah.

Features and Objectives of Islamic Accounting:

Islamic accounting has some features and objectives which are highly differentiated from traditional accounting. Triyuwono (2000) stated some features and objectives of Islamic accounting such as: (a) the transformation from profit maximization to Zakat maximization (as an emphasis of the welfare of the society, not only individual interest), (b) Any activity (accounting) policy must comply with the Islamic Shariah (as Muslims are bound to do this), (c) it would inherently incorporate a balance between individual character and social character (Muslims are the most generous community who look after the welfare of others), (d) the enterprise would be encouraged to participate in releasing humans from the oppression of economic, social and intellectual factors and releasing the environment from human exploitation (providing accurate and appropriate information for making decision, setting appropriate prices of the products, through equitable distribution of wealth, and retaining the environment favorable through green reporting), (e) it provides a bridge between the world and the hereafter (every Muslim has a final goal is to enter into Jannat achieving the satisfaction of Allah through performing good deeds in this world).

Introduction:
Islam is a complete code of life (Al-Quran, 5:3) because Allah (SWT) and Allahs messenger Prophet Mohammad (SAW) gave us guidelines regarding every aspect of human life to be dealt with (AlQuran, 16:89). Allah (SWT) said, This day, I have perfected your religion for you, completed My favor upon you, and have chosen for Islam as your religion--.(Al-Quran, 5:3) So, Islam is not only a religion like other religion based on belief but it is an integrated way of life combining all spheres of life such as individual, social, economic, political, cultural, religious, etc. Accounting is an integral part of the economic life of a person or organization to recognize, measure, record the financial transactions and present the financial position in different financial statements. The interested parties use these statements for making different decisions which is highly affected based on the accuracy, reliability and objectivity of the information and its presentation. Such decisions are expected to be effective and relevant for the Muslims when the presentation of accounting information is done following Islamic ethics and values. About recording, Allah (SWT) said (Al-Quran, 2:199); O you who believe! When you contract a debt for a fixed period, write it down. Let a Scribe write it down in justice between you. Let not the Scribe refuse to write as Allah has taught him, so let him write.---you should not become weary (your contract), whether it be small or big, for its fixed term, that is more just with Allah; more solid as evidence, and more convenient to prevent doubt among yourselves... Accounting is an important way of presenting the performance (financial and economic) of an organization. But the presentation or practices of accounting differ from country to country and organization to organization due to educational, sociological, economic, political, legal, technological factors and organizational typology (Hye, 1988). In business organization the accounting practices are influenced by its profit motive while in the non-profit organization the same is affected by its service orientation (Hossain & Rashid, 1992). Ideological or ethical differences may also influence accounting
* Dr. Syed Mohammad Ather FCMA, Professor, Department of Management Studies , Faculty of Business Administration, University of Chittagong, Chittagong, Bangladesh. ** Mr. Md. Hafij Ullah, Lecturer, Department of Business Administration, Faculty of Business Studies, International Islamic University, Chittagong.

practices. The different worldviews and values give rise to different economic systems and thus need different accounting systems being consistent with them (Hameed, 2000). As per the survey result, 100% of the respondents agreed that the concepts of traditional accounting and Islamic accounting are not same (See Appendix-2).

Rationale of the Study:

Islamic Accounting is a new concept which is now highly recognized by the Muslim Accountants throughout the world for applying in recording and presenting the financial transactions of different organizations. As far as our knowledge concerns, very few works were done to enrich this field to be applied practically. Hence, this work is a modest endeavor to develop the field of Islamic Accounting for practical application.

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. In operational, it performs everything within the limits of Islamic Shariah. t is conceptualized based on the Islamic principles. It is governed by AlQuran and Sunnah or Islamic Shariah. DescriptiveThere is no difference between Normative and Descriptive accounting. It is always society or community oriented.

Traditional 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. (Without any compliance to Islamic Shariah.)

Objectives of the Study:

The main objective of the study is two-fold, i.e., to give an overview of Islamic Accounting System and its adjustments for use and applications in the streams of Islamic economy and business by the Muslims. To achieve the main objective, the study sets the following specific objectives: 1. To justify the need for an Islamic Accounting system. 2. To evaluate the existing concepts of traditional accounting in Islamic perspective. 3. To differentiate between Conventional Accounting and Islamic Accounting. 4. To delineate a process of Islamic Accounting to be applied in the organization.

Needs and Development of Islamic Accounting:

As per the survey result, 90% of the respondents agreed (among them 50% strongly agreed) that it is necessary to have a separate Accounting system for Islamic organizations to achieve their specific Islamic objectives (See Appendix-2). The new dimension of accounting, i.e., Islamic Accounting is essential for some practical reasons which are discussed below: 1. Limitations of Conventional accounting: The conventional accounting provides only the information required to make different decisions by the users of accounting information but it does not disclose the environmental affects, social costs, other religious transactions of an entity. Therefore, the traditional accounting provides the partial information which might lead to wrong decision and wrong dealings of the organizations. On the other hand, Islamic accounting provides all the information including social, environmental, and religious transactions as per their accountability and justice to the related parties and also as per their accountability to almighty Allah (SWT) (Shahul and Yaya, 2003). 2. Compliance to Quran and Sunnah: Every Muslim has a final purpose of life of having the satisfaction of Allah (SWTA) through obeying the Shariah. This is because Muslim believes in oneness of Allah, who is Almighty and All-powerful in haven and earth and He created man just for His servitude and following Him (Al-Quran, 51:56). So, it is required to know and abide
10

2. Operations

In operational, it allows everything to achieve maximum profit. It is conceptualized based on principles of secularism and capitalism. It is govern by Accounting and commercial law and Secular Ethics. There is difference between normative accounting descriptive accounting.

3. Nature

4. Governance

Methodology of the Study:

The methodology followed in this study is mainly of library work basically based on the study of the Holy Quran, Hadiths and related literatures written in conventional and Islamic perspective. Of course some primary survey of opinion data was also made. Thus the article is a hybrid of primary and secondary data. Opinion data were measured by Likert type summated rating scales. Simple statistical techniques e. g. frequency table and modal averages were used to summarize the primary data and information.
9

Accounting Concepts-Islamic Perspective:

The basis of Islamic Accounting is acceptance of the postulates of Tawhid (Oneness and Unity of God-As Islam is a code/way of life given by Allah SWT), Adl (Maintenance of Justice for all), Ihsan (Goodness/ Kindness to all concerned parties), Amanah (Maintenance of Honesty in all aspects), Tawakkal (Trust in God in doing all activities), Infaq (Spending to meet social obligations/ responsibilities), Sabr (Maintenance of Patience), Istislah
The Cost and Management, November-December, 2009

5. Normative or

6. Orientation

It is always firm or individual oriented.

The Cost and Management, November-December, 2009

The Cost and Management, November-December, 2009

Accounting Systems
Points
7. Basis 8. Entity Concept 9. Cost or Price

Accounting Systems
users of those statements. These financial statements include income statement, owners equity statement, cash flow statement and balance sheet. But Islamic accounting in addition requires preparation of: (a) Reports of Funds for Zakat and Their Uses detailing the sources of funds for Zakat, methods of its collection including controls to safeguard these funds and their uses; (b) Reports about prohibited Income & Expenses to disclose income earned from prohibited transactions or sources and expenditures prohibited by the Shariah and how those earnings were disposed of and also the causes of these income; (c) Social Responsibility Reports, and Human Resources Development Reports (AAOIFI 3). Some scholars recommended preparing value added statement. A value added statement (Appendix-1) stresses entity performance from a community viewpoint as opposed to focusing on owners, which is consistent with the Islamic view that firms are accountable to the community (Napier, 2007). To represent the accurate financial position of the firm, Baydoun and Willett (2000) suggested preparing current value balance sheet at the end of the accounting period. Fictitious Assets should not be revealed in the balance sheet and for determining the net realizable receivables, direct method of writtenoff should be adopted, that is, revalue the account to determine the extent of the loss to be specifically provided for (Hamat, 1994). 4. Zakat Calculation: The word Zakat literally means purification. One of the five pillars of Islam is Zakat. A rich Muslim or a solvent business is compulsorily required to pay Zakat once a year basically to the poor to diminish poverty and minimize the financial gap between them. Zakat has been described as the cornerstone of the financial structure in an Islamic State (Siddiqi, 1982). Muslim sole proprietors and partners are obliged to pay Zakat on both personal wealth and on business (Faris, 1966). For payment of Zakat the assets must possess the characteristics which are (a) Perfect ownership on assets, (b) assets is growing or productive, (c) assets above the basic requirement or surplus assets (d) assets owned for a full year. For calculation of Zakat, valuation of assets should be according to the current market price or net realizable value. Inventories valuation should not be the lower amount of cost or market price or there should not be maintained any allowance for doubtful accounts receivable (Clarke et al., 1996). 5. Dealing with Interest: Interest is the predetermined fixed charge on borrowing or investing money but any transactions relating to interest (in any form) is strictly prohibited by Islamic Shariah. Hence, Islamic organizations (banks) use alternative modes of borrowings/investments to meet their needs of financing. The alternatives are discussed below: a) Mudarabah (trust financing): The bank acts as a partner, providing cash to the borrower and sharing in the net profits and net losses of the business (Haqiqi & Pomeranz, 1987). The loan is for an undetermined period, although the contract may be rescinded by either party. Kahf (1978) defines Mudarabah as: An Islamic mechanism for introducing monetary assets into production activity by transforming them into real factors of production as a result of a joint action between the owner of the assets and the entrepreneur. As this method, the lender supplies capital to an agent for trading purposes and the borrower would contribute only his work and experience. Afterwards, the net profit is divided between the two parties according to the ratios agreed in advance in the contract. In case of loss from normal business causes or natural causes, however,
14

Accounting Systems
the lender bears all the loss and the borrower receives no reward for his effort. This is consistent with the prohibition of a fixed return, i.e., interest on one's capital. b) Murabaha (cost-plus trade financing): The bank, as a partner, provides the finance for purchasing goods for a share of the profit once the goods are sold. The bank may or may not share in any losses incurred. Repayment may be either in lump sum or in installments. The accounting entries for these transactions are: when the bank buys goods and pays cash; Debit-cost of goods; and Credit-amount in bankers-check (Cash); When the bank sells the goods to the client on a deferred payment basis: Debit-Investment (cost-plus-profit), CreditCost of goods (cost) and Credit-Unearned profit (profit margin) (Hamat, 1994a). c) Musharaka (Participation financing): Musharaka is another mode of interest-free financing where the bank and the client agree to join in a temporary partnership to effect a certain operation within an agreed period of time. Under this mode of financing both parties contribute to the capital of the operation in varying degrees, and agree to divide the net profits/losses actually earned in the ratios agreed upon in advance. d) Ijara (Rental/lease financing): Ijara may be defined as an agreement whereby the lessor conveys the right to use a specified asset to the lessee for an agreed period of time in return of a fair rent. In Ijara financing bank purchases fixed assets and allows the clients/businesses to use in return for rental income. There are two types of lease arrangements; finance lease (A long-time lease where the lessee gets the ownership of the asset) and operating lease (A short-time lease where the lessor retains the ownership of the asset). There is no Shariah restriction with regards to income recognition, or presentation. But, if the profit margin is tied to the interest rate, this is not permitted as it creates uncertainties. The lessees' total rental payable or the banks' total rental income varies according to changes in the rate of return of the bank. In case of finance lease, lease receivable, less the profit margin which is not received, should be recorded as fixed assets in the balance sheet, and In the case of operating lease, the lease, assets should be recorded as fixed assets in the balance sheet of the lessor and depreciation for these assets is provided periodically (Hamat, 1994b). 6. Islamic Accounting Model: At this stage Islamic Accounting model is pertained below. The model indicates that Islamic Accounting works under the peripheries
The Rules of Islamic Shariah Islamic Suciety Firms/Organizations
Contracts/Transactions Accounting and Reporting Standards Accounting Policies Accounting Cycle

Accounting Systems
As per the organization, the position of the respondents is given below: Explanation No. of Respondents Percentage University of Chittagong 24 30 IIUC 28 35 Islamic Banks 16 20 Others 12 15 Total 80 100

Islamic Accounting
Unity of God (Allah). (Tawhidism) Firm does not have separate financial obligation.

Traditional Accounting
Economic rationalism. Firm and Owner have separate entity and financial obligation.

follows (Ahmed, 1994): (a) Interest is prohibited while trade is permitted (subject to restrictions), (b) Illegal or unjustified transaction is prohibited, (c) Uncertainty (al-Garer) in trade contract is not allowed, (d) All transactions must be conducive to welfare of all concerned. Some aspects of Islamic accounting practices are enumerated as below: 1. International Accounting Standards (IAS): Accounting Standards are the norms of accounting policies and practices issued by the accounting bodies for the guidance of their members regarding the treatment of items which makes up the financial statements and the disclosure therein (Hye, 2000). The IAS which is currently practiced was developed interest-based western socio-economic culture and environment. But Islamic organizations, established and operated based on Islamic Shariah to achieve a legitimate objective, work in a different environment using different financial instruments and perform some transactions which are unknown to the western world. Hence, The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous not-for-profit corporate body that was established in Bahrain to prepare accounting, auditing, governance, ethics and Shari'ah standards for Islamic financial institutions and the industry on 26th February, 1990 to attain the following objectives (1) to develop accounting and auditing thoughts relevant to Islamic financial institutions; (2) to disseminate accounting and auditing thoughts relevant to Islamic financial institutions and its applications through training, seminars, publication of periodical newsletters, carrying out and commissioning of research and other means; (3) to prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions; and (4) to review and amend accounting and auditing standards for Islamic financial institutions. 2. Accounting Cycle: The order or sequence in which accounting procedures are performed is known as Accounting Cycle (Khan, 1995) or it is a process by which accountants produce an entitys financial statements for a specific period of time (Horngren and Harrison, 1992). Accounting cycle is an organized way to reach the destination of accounting objectives and which basically consists five stepsRecording (through journal), Classifying (through ledger), Summarizing (through Trial Balance), Preparation of financial statements and Interpretation and Analysis of financial statements. In Islamic accounting this accounting cycle may be applied fully for the financial transactions only but not for non-financial transactions. Islamic accounting records and prepares reports relating to some transactions which may not be possible to measure in terms of money (for example, environmental damages/ degradation by the firm) and double entry accounting system may not be appropriately followed for these types of transactions because the firm generally is not compensating anything to the community. In interpretation and analysis the accountants should justify the performance of the organization calculating new ratios regarding contribution to employees, and employees development, contribution to society and also to the environment in relation to value added (Mirza and Baydoun, 2000). 3. Preparation of Financial Statements: Each entity prepares different financial statements as per the directions of law and of the requirements of the information of the
13

of Islamic rules and Shariah and Islamic society and produces some differential reports not required in traditional/conventional accounting.

Policy Implications:
Among others the major policy implications of this research are as follows: (a) Muslim owners of business firms and concerns are expected to have guidelines from this article to report their firms financial recording and reporting under Islamic accounting systems. (b) The researchers in Islamic Accounting may usefully use the issues raised in this article for more comprehensive studies in Islamic Accounting and practices in a Muslim majority country like Bangladesh. (c) The Government, for ensuring social welfare and proper Zakat collection and distribution, may practice Islamic Accounting as enunciated in this article.

Market or Selling price Historical cost rather than rather than Historical Market price is preferred. cost is preferred. Full disclosure to satisfy any reasonable demand for information in accordance with the Shariah. Business continues not forever but depends on contractual agreement between parties. Consistency based on Shariah. Most favorable society (justice). Limited disclosure provision of information subject to public interest.

10. Disclosure

11. Going Concern

Business continues forever or unlimited period of time.

Conclusion:
So far a modest attempt has been made to reveal the objectives, nature and need of Islamic Accounting contrasting it with the traditional or conventional accounting. The issues raised on principles and practices of Islamic Accounting here will work as stepping stones for further research and analysis in this emerging and essential field of knowledge for the Muslim owners and proprietors of profit and not-for-profit organizations. r

12. Consistency 13.Conservatism

Consistency based on GAAP.

to Most favorable impact on owners and least favorable to society. Periodical measurement of performance. Monetary value based.

14. Accounting Period 14. Unit of Measurement 15.Accountability

One lunar year for Zakat calculation. Quantity based and monetary based (Zakat calculation). Public accountability focusing on the community who participate in exploiting resources.

References:
Ahmed, E. A. (1994), Accounting Postulates and Principles from an Islamic Perspective, Review of Islamic Economics, Vol-3, No. 2. Abdul-Rahman, A. (1996), Legal Systems for Islamic Banks, Cairo: The International Institute of Islamic Thought. AAOIFI (1999), Accounting, Auditing and Governance Standards for Islamic Financial Institutions, Manama, p. 58. Adnan, M. and Gaffikin, M. (1997), The Shariah, Islamic Banks and Accounting Concepts and Practices, Paper presented at Accounting, Commerce and Finance: The Islamic Perspective International Conference, University of Western Sydney, Macarthur. Ahmed, E. (1990), Islamic Banking: Distribution of Profit, Unpublished Ph.D. Thesis, University of Hull. Al-Obji, K. (1996), Measurement and Distribution of Profit in Islamic Banks, Cairo: The International Institute of Islamic Thought, p. 35. Attiah, M. (1989), Financial Accounting Theory in Islamic Thought, Islamic Banks International Union. Baydoun, N. and Willett, R. (2000), Islamic Corporate Reports, Abacus, Vol. 36, No. 1, pp. 71-90. Belkaoui, A. (2000), Accounting Theory, London: International Thomson Business Press.

Personal accountability focusing on individuals who control resources.

16. Equity 17. Profit

Recognize each party Survival of the fittest. equally. Determine accurate and reasonable profit. Tries to maximize profit.

18. Ownership

It recognizes relative It recognizes absolute ownership on assets ownership on assets and firm. Reports socio-economic and religious events and transactions. Reports only economic events and transactions.

19. Reports

Conventional Income Statement versus Value Added Statement (Shahul and Yaya, 2003).
Conventional Income Statement Amount Value Added Statement Amount Sales Revenue Less: Material used.. 200,000 Wages...400,000 Services purchase.600,000 Interest.....120,000 Depreciation.. 80,000 Profit before tax... Less: Income tax (Assume 20%)... Profit after tax . Less: Dividend payable. Retained earning for the year..... 2,000,000 Sales Revenue... Less: Bought in materials 200,000 Services purchase...600,000 Depreciation ....80,000 Value Added to distribute. 1,400,000 Distributions: 600,000 To employees 120,000 To capital providers: 480,000 Interests.120,000 200,000 Dividends. 200,000 280,000 To Government.. Retained earnings... 2,000,000 880,000 1,120,000 400,000 320,000 120,000 280,000 1,120,000

Appendix-1

Clarke, F., Craig, R. & Hamid, S. (1996). Physical asset valuation and Zakat: Insights and implications. Advances in International Accounting, 9, pp. 195-208. Faris, N. (1966). The mysteries of almsgiving: A translation from the Arabic of the Kitab Asrar alZakah of Al-Ghazzali's Ihya "Ulum al-Din. Beirut: The American University of Beirut, p.8. Gray R., D. Owen and K. Maaunders (1988), Corporate Social Reporting: Emerging Trends in Accountability and Social Contract Accounting, Auditing and Accountability Journal, , Vol. 1, No.1, (1988). Hamat, M. (1994a), The Accounting System in Islamic Banking, Conference on Interest-Free Banking Islamic Financial System, Malaysia, January-1994. Hamat, M. (1994b), Accounting Standards and Tax Laws in Islamic Banking, Conference on Interest-Free Banking Islamic Financial System, Malaysia, January-1994. Hameed, S. (2000), The Need for Islamic Accounting: Perception of Its Objectives and Characteristics by Malaysian Accountants and Academics, Ph.D. Thesis, University of Dundee. Haqiqi, A. & Pomeranz, F. (1987), Accounting needs of Islamic banking, Advances in International Accounting, 1, pp. 153-168 Horngren, C.T. and Harrison, Jr., W.T., (1992), Accounting, Second Edition, Prentice Hall Englewood Cliffs, New Jersey-07632, 1992, p.145. Hossain, A.T.M.Tofazzel & Rashid, Harunur (1992), A Study of the Efficiency and Efficacy of Accounting System of Chittagong University, Chittagong University Studies, (Commerce) Vol. 8, p.23. Hye, M. A. (1988), A Study of the Accounting And Reporting Practices of Bangladesh Shipping Corporation, Chittagong University Studies, (Commerce) Vol. 4, p.167. Hye, M. A. (2000), Accounting Theory, Yeasmin Prokashoni, Third Edition, p.15. IIIT (1988), Islam: Source and purpose of Knowledge, Herndon, Virginia: International Institute of Islamic Thought, Islamization of Knowledge Series No.5, 1988. Islam, M.Z. (2000), Accounting: Philosophy, Ethics and Principles-The Islamic Perspective, Bangladesh Institute of Islamic Thought (BIIT), Dhaka, p. 64. Kahf, M. (1978), The Islamic Economy: Analytical Study of the Functioning of the Islamic Economic System (Plainfield, Indiana: Muslim Students Association of the United States and Canada. 1978), p. 71. Khan, M.M. (1995), Advanced Accounting, Eighth Edition, Ideal Library, Dhaka, 1995, p.23 and p.31. Lewis, M.K. (2006), Accountability and Islam, Fourth International Conference on Accounting and Finance in Transition, Adelaide, April 10-12, 2006. Mirza, M. and Baydoun, N. (2000), Accounting policy in a Riba Free Environment, Accounting, Commerce, and Finance: The Islamic Perspective Journal, No. 4 (1), pp.30-40. Napier, C. (2007), Other Cultures, other accountings? Islamic Accounting from past to present, th 5 Accounting History International Conference, Banff, Canada, August 9-11. Shahul H. (2001), Islamic AccountingAccounting for the New Millennium? Paper presented at the Asia Pacific Conference 1, Kota Bahru, Kelantan, October 10-12, 2001. Shahul H. and Yaya, R. (2003), The Future of Islamic Corporate Reporting: Lessons from Alternative Western Accounting Reports The International Conference on Quality , Financial Reporting and Corporate Governance, 28-29 July, 2003. Siddiqi, S. (1982). Public Finance in Islam. Delhi: Adam Publishers, p.8. Triyuwono, I. (2000), Shariah Accounting: Implementation of Justice in a form of trust metaphor, Journal of Accountancy and Auditing, Indonesia, No. 4(1), pp.1-34. Web Address: (1) Hameed, Islamic AccountingA Premier, http://www.iiu.edu.my/iaw/Articles. (2) Shahul, H.--The Need for Fundamental Research in Islamic Accounting, http://www.iiu.edu.my/iaw/Articles. (3) AAOIFI web site: www.aaoifi.com

To make the analysis easier, Coding has been taken as: +3 = Strongly Agree; +2 = Agree; +1 = Some What Agree; 0 = No Response; -1 = Some What Disagree; -2 = Disagree; -3 = Strongly Disagree. The result and analysis of the survey is stated below:
1. The concepts of Traditional Accounting and Islamic Accounting are not same: Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 12 44 24 0 0 0 0 80 Percent 15 55 30 100 Mean 4. Going Concern Concept may be taken as a concept of Islamic Accounting. Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 12 40 12 0 8 0 8 80 Percent 15 50 15 10 10 100 Mean

+1.85

+1.20

2. It is necessary to have a separate Accounting system for Islamic organizations: Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 40 24 8 0 4 4 0 80 Percent 50 30 10 05 05 100 Mean

5. Cost Concept may be taken as a concept of Islamic Accounting. Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 16 36 4 0 4 20 0 80 Percent 20 45 05 05 25 100 Mean

+2.05

+1.00

3. Entity Concept may be taken as a concept of Islamic Accounting: Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 28 24 16 4 0 0 8 80 Percent 35 30 20 05 10 100 Mean

6. Conservatism concept may be taken as a concept of Islamic Accounting.

Coding
+3 +2 +1 0 -1 2 3

Frequency
28 16 12 4 4 8 8

Percent
35 20 15 05 05 10 10

Mean

+1.55 -

Total
Mean CodingFrequency +3 +2 +1 0 -1 -2 -3 Total

80
Percent 12 44 12 0 4 4 4 80

100
Mean 15 55 15 05 05 05 100

7. Materiality concept may be taken as a concept of Islamic Accounting. Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 16 40 4 12 4 4 0 80 Percent 20 50 05 15 05 05 100

9. Accrual concept may be taken as a concept of Islamic Accounting.

Appendix-2 Questionnaire of Opinion Survey Findings and Analysis A study has been conducted on the experts in accounting to justify their opinion regarding the acceptance of principles of Islamic accounting. The educational qualifications of the respondents are 100% Masters in Business Studies and all of the respondents are Muslim. As per their profession, the position of the respondents is given below:
Explanation No. of Respondents Percentage University High level Teachers Executives Mid - level Executives Junior Officials Total

+1.50

+1.40

Source: Developed through literature review and research.

Islamic Accounting Systems and Practices:

Islamic accounting does not avoid all methods and techniques applied in conventional accounting saying illegal but it justifies all these things through the testing stone of Quran and Sunnah. Islamic accounting accepts a conventional method if it is not conflicting with the values and principles of Shariah and rejects if it conflicts and it also incorporates some other norms and values not practiced by conventional accounting for establishment of justice. The basic principles governing summarization of financial transactions are as
The Cost and Management, November-December, 2009

8. Money Measurement concept may be taken as a concept of Islamic Accounting. Coding +3 +2 +1 0 -1 -2 -3 Total Frequency 16 52 0 0 8 4 0 80 Percent 20 65 10 05 100 Mean 10. Do you think that there would be any problem(s) in implementing Islamic accounting in your organization? If yes, Please mention the problems below. What accounting principles & practices do you observe now to be contradictory to Islamic Shariah? Please mention, if any.

Recording (Journal)

Classifying (Ledger)

Summarizing (Trial Balance)

a) b) c) d) e) f) g)

Preparation of Financial Statements

Interpretation and Analysis

Income Statement/Value Added Statement Owners Equity Statement Balance Sheet Cash flow Statement Reports of Funds for Zakat and Their Uses Reports about prohibited Income & Expenses Social Responsibility Reports h) Human Resources Development Reports

11. +1.70

28 35

24 30

20 25

08 10

80 100
15 16

Figure-1: Modified from Mirza and Baydoun (2000).

The Cost and Management, November-December, 2009 The Cost and Management, November-December, 2009

The Cost and Management, November-December, 2009