Definition Of Important Concept And Background Accounting Essay


This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Conventional accounting objectives and concepts are needed to guide existing accounting practice, prescribe future accounting practice and define key terms and fundamental accounting issues. The accounting measurement is based on the cost principle that considers the acquisition cost or historical cost. The method that adopts the historical cost and conservatism concept is to ensure the repayment from capital. However, this principle is disagreeing from the Islamic point of view because it does not match with the concept in Shari'ah about fairness and justice.

Islamic finance and banking growth rapidly during the last twenty years in Muslim countries around the world. Islamic accounting is designed to serve different principles of financial instruments that are founded on Shari'ah. This development under the strongholds country such as Malaysia, Bahrain and Pakistan, is now increasingly being witnessed. There are many new challenges faced by Islamic financial institutions and conventional, multinational financial institutions that provide Shari'ah compliant products within the same industry. It is not surprising that some Islamic financial institutions would prefer to report in the global accounting which apply IFRS for competitive reason. IFIs may wish to report under IFRS, they are sometimes restricted because of local requirements or concerns from users of their financial reports.

Furthermore, accounting concepts can be described as rules, principle, practices, postulates and assumption. Based on the concept of conservatism, we know that the basic accounting principle is use of historical cost for asset valuation. There is an issue raises that Islamic accounting whether the concept of conservatism is relevance or not. Let us refer to the principles of zakat where zakat must be based on current market value or cash equivalent value for the trade assets. The use of current prices on the due date of zakat is the best recommendation from many scholars. The use of current market value is wants to find the most accurate valuation of wealth from zakat payer to be subjected for zakat. This is because the principle of zakat design to serves the recipients and payers for justice and fair. However, the principle of conventional accounting practice is choosing lower of cost or market value. By using conventional accounting practice it may lead to understatement in the financial report of trade assets that subjected for zakat. This kind of cost concept definitely cannot be acceptable in Islam because the preparer of financial report in Islam should be aimed for justice and fairness as well.

Accounting recognition is the basic elements of recording in the financial statements. The concepts include the basic principles that when is the time to recognize revenue, expense, gain and loss in the entity's income statement. We should recognize the revenue when it is realized in conventional accounting perspectives. Realization of revenue occurs when the entity can receive the revenue with their right and the obligation on the part of another party is remit. The use of accrual basis accounting is better than the cash basis accounting in conventional practice but it is in conflict with Islamic accounting as it is claimed to misleading and may underestimate the amount of zakat.

From traditional perspective, the matching principle recognized the expense when the expense is related directly to generate revenues or when the expense is incurred in the related period. The fairness and justice to the shareholders and stakeholders must be considered during allocates expenses to related revenue according to matching principle from Islamic perspective. The measurement attributes to the financial report should be guided by the relevance, reliability, understandability and comparability of the information being use by related parties. In order to ensure the reliability and comparability of the information, it must be supported with objective, logical and relevant methods, and consistency of the use of methods and conservatism in the process.

In terms of disclosure requirements, traditional accounting perspective provides limited disclosure provision of information that subject to public interest. However, Islamic accounting perspective requires additional disclosure in the financial report in order to satisfy any reasonable demand for information in accordance with the principle of Shari'ah. Their full disclosure does not mean to disclose everything in the report but the preparer of account should disclose any information that is important to users for serving their God. The Islamic concept of social accountability encompass the accountability is ultimately to God. The fundamental concept of Islamic accountability stated that all resources are giving to individuals in a form of trust. However, the success of individuals depends on their performance in life.

The majority had point out different critique of conventional accounting about its deficiencies from their own perspective. Thus, the Islamic academics are concerns with the issues raised. There is some researchers concern with the application of conventional accounting to Islamic societies in other areas. The religious content is excluded due to the differences between Islam and the history in Western society. The researchers always highlight this point when the proposed solutions are not compatible with an Islamic.

1.2 Why the Issue under Discussion is Crucial?

We had found that the current issue under discussion is crucial because of the lack of standardized in accounting. Most of the multinational conventional banks that offer Islamic finance normally will make the report based on their local requirement. IFRS is the most common form of reporting because of the reporting purpose own to the jurisdiction. Although their Islamic finance operations is incurred in large amount, the conventional alternative is continue apply in the report. It is hard for the investor to make their decision when the financial institutions apply different standard in their financial report. The application of difference accounting practices by the financial institutions can cause the difficulties in the preparation of financial report. For institutions offering Islamic finance products and services, the Standards applied may not offer appropriate disclosure requirements because of the differences and difficulties.

There is significance different in objectives of financial reporting between the Islamic perspective and Conventional perspective. From the conventional perspective, we know that the objective for accounting in financial report should provide information which is relevant and reliable that allows its users to make correct decision. From the Islamic perspective, the objective of financial reporting is to ensure the entity is follow the principles of Shari'ah and its concepts of fairness, priorities to society and compliance with business values. IFRS is reliant on a strong framework of principles that emphasis on profit maximization and economic event or transaction whereas in Islamic finance the transaction should be based on the provisions of the Shari'ah. IFSs are faced with the very real dilemma of reporting their performance and position against the same set of users in the global financial markets.

1.3 Objective of Topic under Discussion

Islamic finance has continued to grow rapidly at the international level from the recent global economic downturn. There are some reasons that Islamic accounting is rising which is to fulfill the needs of Islamic community where the aspects of conventional accounting do not accord to the Islamic principles. A homogeneous code of Shari'ah compliance finance had emerged around the world in the new century. A conflict occurs between the transactions and product accord to Shari'ah compliance and conventional accounting which may lead to a clear lack of a single financial reporting framework. Thus, similar entities become difficult in make comparability across border on the financial report. This lack of consistency could be drawback due to increasing demands by investor in IFIs, who look for greater opportunity in global market. This report sets the scene for a broad project which will aim to inform the international agenda on financial reporting by IFIs and support the work of accounting and auditing standard setters in this area.

The main objective of this discussion is to determine the quality of financial report from Islamic and Conventional Accounting Perspective based on the characteristic of relevant and reliable issue. The usefulness of financial report is important to enables users make the correct judgments, predictions and economic decision. We will find out the argument of the practice and policy among the two different perspectives which could influence the quality of financial report. We will further outlines key practices in Islamic accounting distinct from those found in conventional accounting and that could lead to misrepresentations of financial information if they were accounted for using IFRS. In the discussion, our group members will express our opinion under the Islamic and Conventional accounting perspective based on the argument. Some considerations relating to the specific practices of IFIs are stated in the body of this report. We hope the findings can further encourage the development of strengthen the financial reporting of Islamic financial institutions.

Main Discussion

2.1 Accounting Standards of Islamic Financial Institutions


Dr. Seif I. Tag El-Din(2004), "...Never get bored with recording it, however small or large, up to its maturity date, for this is seen by Allah as closer to justice, more supportive to testimony, and more resolving to doubt .."(al-Baqara: 2 82).They are believe in Quranic verse which provides them a meaning of accounting. Interest in financial dealings is the main reason of the existing of Islamic financial accounting methods and principles but there are still others various issues which build up the case of Islamic financial accounting standards.

Main content

Islamic bank hold the objective to equally distribution wealth to people which mean that accept the deposit from "surplus" people (liability) and offer financing (asset) to "deficit" people. There are significant differences treatment in the similar transaction in term of their processes of recognition, measurement and recording of transactions and fair presentation of right and obligation between the Islamic accounting and conventional accounting.

In the sense of relevance concept, information reported is used by the potential investor in making right decisions with their future dealings with that relevance entity. It is also used by internal management in order to evaluate their company's performance then construct their strategic or future plan on their company's activities and financial services. Tax authorities depends on the information to assess the Zakat on Islamic banks' fund and targets of its dispersal; Information on cash flows help the users to evaluate on the ability to generate sufficient dividend income for their respective investment holder. Besides that, information about investment rates of returns on the bank's investments and share of profit return accruing to equity and investment holders. In contrary, we found that some of the information is specially provided to specific parties. For example, government's agencies have to the right to directly obtain information that best serve of their needs. This may insufficient the common information contained in the Islamic banks financial report to their external users.


Success of Islamic banks depends on their compliance with Shari'ah and their ability to realize the rate of return commensurate to investment risk assumed.

Other Cultures, Other Accountings? Islamic Accounting From Past To Present


The article is about the Islamic the influence of emergence of Islamic accounting and their implication on the development of accounting in Islamic societies. Emergence of Islamic accounting provides an opportunity to study the factors of emergence and thus investigate within the range of accounting. Formation of Islamic accounting should undergo the harmonization process with International Financial Reporting Standards at the ease to preserve core Islamic value which is consistent with Shari'ah law.

Main Content

Some conventional practices are unacceptable under the light of Shari'ah. For example, borrowing or lending with interest, manufacturing alcohol and gambling are prohibited in Islamic law so that interest seems to be prohibited in Islamic accounting.

Arguments are arising within the Islamic perspective toward conventional perspective on accounting concept and practices as below:

Entity Theory

Unacceptable: Khan (1994, p. 9) notes that there is an ethical problem associated with dealing with a company as a separate entity, as the owners are not liable for the company's debts in the event of insolvency, but have the rights to residual profits.

Acceptable: Adnan and Gaffikin (1997), Abdul-Rahman (1996), Attiah (1989), and Shihadah (1987) asymmetry between risk and reward and the possibility of limiting liability were accepted in mudaraba contracts, which in their earliest form were a type of limited partnership.

Going Concern

Unacceptable: Adnan and Gaffikin (1997) reject it on the basis that accepting this concept acknowledges the acceptance that there is something other than God that will live continuously or indefinitely - in this case the firm - which is not acceptable in Islam.

Acceptable: Zaid (1995) claims that Islam recognises the concept because continuity is one of the bases on which Muslim life is built. He further argues that Islam emphasises the continuity of business activities because they are the source of zakah, which should be paid every year.


Unacceptable: Gambling and Karim (1991) argue that adherence to the concept of conservatism would lead to understatement of assets that could be subject to zakat, which leads them to conclude that this concept is not relevant for Islamic financial reporting.

Acceptable: Khan (1994) conservatism sometimes contradicts Islamic principles, but in other cases he considers that conservatism in financial reporting helps to maintain public welfare, by restricting over-optimistic valuations and distribution of unearned profits.

Historical Cost

Unacceptable: Sulaiman(2000) prefer the use of current values rather than historical cost, on the basis that zakah computation requires current values.

Adnan and Gaffikin (1997) criticise the historical cost concept on the basis that it can be misleading in terms of giving out of date indications of value. Misleading accounting is considered to be inconsistent with Islamic values of just dealing in business and society.

Acceptable: Shihadah (1987) sees the concept of tended as requiring the recovery of the real economic rather than the nominal capital; thus, it requires the use of current values rather than historical costs.

AAOIFI adopted the historical cost concept, justifying it by arguing that, at the present time, it is not evident that sufficient means are accessible to apply current cost in a manner that produces reliable information. (AAOIFI, 1999a, p.65)


Unacceptable: Gambling and Karim (1991) and Khan (1994) argue that the matching concept is less significant from the Islamic perspective, because the use of an asset-liability approach for income measurement is more consistent with Islamic principles.

Acceptable: Attiah (1989) suggests that the matching concept is necessary from an Islamic perspective to determine zakah and also osher (originally an Ottoman tax on agricultural production).AAOIFI justified its adoption of this concept by arguing that it is supported by the Islamic concept of assigning the responsibility of the cost to the recipient of benefit (AAOIFI, 1999a, p.63).

Accrual Basis

Unacceptable: Hendriksen (1982) argues that the significant biases created by the use of allocation procedures cast doubts on traditional accounting methods, and the only way to avoiding some of these biases is to emphasise the reporting of cash flow information.

Acceptable: Hamat (2000, p.404) criticises the accrual basis on the grounds that if income from mudaraba financing were to be recognised on an accruals basis, the distribution would require Islamic banks to advance cash from other sources before depositors' accounts are collected. If these accounts turn bad, banks would have to use their own funds to cover losses, thus violating the condition of the mudaraba arrangement, which dictates that losses are borne by the owners of capital.

Full Disclosure

Disclose information is mainly for Islamic community in the first place which the disclosure is mainly to advise the Islamic community about its operation as well as use for internal management. Everything that is believed to be of importance to Islamic users for the purpose of serving God should be disclosed.

AAOIFI justified its adoption of this concept by arguing that it is supported by the Islamic concept of assigning the responsibility of the cost to the recipient of benefit (AAOIFI, 1999a, p.63).


Obviously, the discussion or application of accounting from Islamic perspective cannot reach a consensus within the Islamic researcher themselves. There are significant different treatments for recording or disclosure specific transaction or even recognition concept. For example-"From an Islamic perspective, profit only arises from effort, and profit is realised when the firm receives the money, or is entitled to it. Profit cannot be created by making assumptions and evaluations - it requires liquidation (Hmoud, 1996, p. 90)."We can see from above that some researcher are agree to harmonize the conventional accounting into Islamic accounting from Islamic point of view but there are also disagreement come from another group of research to subvert the wording of the former. We think that Islamic accounting does not have a standardize practice in preparing or performing their financial statement. As long as you can explain with the Shari'ah Law and stand you point, you can change the method of practicing and the ways of performing the financial statement!

2.3 Malaysian Accounting Review Volume 4 No .1 July 2005


Ibrahim.S.H.M & Rizal.Y(2005), Naqvi (1981) views that the Islamic ethical and moral code of conduct permeates human life whether individual or collective in a way that Islam considers ethics as an offshoot of the Muslim belief system itself. Siddiqi (1979) notes that 'adala (justice) and Ihsan (benevolence) (Al-Qur'an 2:177;5:8; 4:36) which offer guidance in almost every action in human life. Therefore, Islamic business should also be characterized with these manners. In this article, conventional accounting have been criticized on its appropriateness in apply on Islamic business organization. There are 3 groups of inappropriateness been discuss in the following section which are (i) contradictory to Islamic teachings, (ii) irrelevance to Islamic accounting objectives, and (iii) insufficiency in focusing on Islamic socio-economic objectives.

Main content

Conventional accounting being doubt for inappropriateness in applying in Islamic business world for the following reasons:

The Contradictions of Conventional Accounting to Islamic Teachings

Conventional accounting seems to increase the gap between the rich and the poor and the environmental issue and ethical value is omitted.

Muslim countries are not allowed to develop stock exchange and thus the information oriented toward market seem does not make any sense in term of social and economic perspective.

Conservatism concept and going concern concept are not appropriate with the reason of it's go against the Qu'ran and Sunnah, meanwhile counter the attitude against Allah.

Irrelevant to Islamic Accounting Objectives

Matching concept is not fulfilled the objective of Islamic accounting which generally uphold the Zakat accountability with asset-liability approach rather than revenue-expense approach.

Again, it is not make a sense to putting an information that are market oriented rather than social oriented since the Islamic accounting's primary objective in Zakat.

Insufficiency in Focusing on Islamic Socio-Economic Objective

Information that generally contain in conventional accounting being claimed insufficient in uphold the accountability to Allah, which generally mean to Zakat.

Information such as treatment of employees, the impact of business on its environment and devotion to the Islamic code of ethics are the additional information needed to disclose in Islamic financial reporting.

Decision usefulness is criticised on whether the information disclose in the financial reporting useful for their respective users. In Islamic perspective, information which helps to determination of Zakat, support in estimating cash flows that might be realized from trade with the Islamic bank, weighing the Islamic bank's discharge of its fiduciary responsibility to safeguard fund, discharge of their social responsibility, and etc. should be disclosed. From conventional point of view, the information that needed by the user are such information associated with the financial liquidation of a company in facing their debt and routine operation, profit make and the potential dividend distributed, ability of the firm to generate favourable cash flow and etc..

Differences of stewardship concept with conventional accounting are potential investors and creditors are not included in user categories, it is not serving as prediction model for the users and it is emphasize on what has been accomplished in the past. Ibrahim.S.H.M & Rizal.Y(2005), Mirza and Baydoun (2000) support this objective and suggest that the stewardship function must be the focus of attention of accountants of Islamic institutions in reporting to external parties.

In an ideal world, Islamic accounting assume that all people tend to avoid unwanted practice of cheating as Allah always watches them so the accounting information may assume to be accurate. But in real life, it may be not! Since arising of such possibility of payment of zakat not because of Allah, we cannot just assume that creative accounting does not exist. Islamic accounting has transform profit maximization to Zakat optimization, activities carried on by an entity should be based on Shari'ah. Balancing between individual character and social responsibility as well as surplus (rich person) and deficit (poor people) should be the main objective through the use of Zakat.

Current cost valuation are acceptable in Islamic accounting practice as they claim that historical cost seem to underestimated the asset of a company. Zakat is calculated based on current valuation but argument arising saying that historical cost calculation may be provide highly reliable source of information about the financial position of a company. The other researcher oppose the former statement by saying that use of historical cost could dishonest the principles of disclosing the truth (Al-Qur'an 2:42).


Islamic accounting perspectives are based on the guidance of Shari'ah through Quran by their Allah. The main concern of their objective toward business is their social responsibility which meant by equalizing wealth between rich and poor. This can be done by zakat payment. According to Qur'an, they can be purified with the payment of zakat. But, can we conclude that they are no manipulation in their financial statement as Allah keep watching over people's act? Can we assume that all Muslim are obeying the law of Shari'ah? Islamic community is a case in point. Under Islam the social order is closer to collectivism and the rights of private ownership are ultimately subordinate to Allah. Consequently, the forms of presentation and disclosure which are most applicable to a moderately individualistic society may not be so relevant to the kind of accountability required by the Islamic Shari'ah.

Islamic Accounting And Business Practices: A Conceptual Framework


This paper discussed about Islamic accounting means the concept of accountability in Islam [taklif]. Allah control Man to give back the entrusted things to which they are due. Therefore, Man is accountable for the religious aspects and also for social, business and contractual dealings.

Main Content

The problems in traditional financial accounting are inadequate and incomplete records. If the good accounting information is complete, it can provide intended users with all the necessary information to fulfil information needs and requirements. However, it's also creating problems in accounting system. They must including all relevant information in order to provide accurate information. From my point of view, traditional accounting emphasizes on users requirement of information while Islamic accounting emphasizes on accountability of the accountants in disclosing the information.

The entity concept which states that the firm and its owners are separate entities and one firm is separate from another firm because the owners are not liable for the company's debt at the time of bankruptcy but have the rights to residual profits which are unlawful and similar to gambling. This concept was disagrees by Islamic Shari'ah. If the owners become bankrupt, then the liabilities may be distributed to their successors or legal inheritors. From my view, entity concept is needed to record the business's transactions separately and to distinguish them from the owners' personal transactions.


As a conclusion, from Islamic perspective, they have stated that accountability is a basic constitutional concept in the Muslim society and belief. They have their own accounting system practice in recording and communicate the transactions.

The Development Of the Conceptual Framework For Accounting For Islamic Banking


The emergence of Islamic banks and financial institution and the specialist in Islamic Shari'ah and accounting have led them to seek the most appropriate means to provide reliable and relevant information to users of financial statement of organizations. According to Stauton 1984, different societies have different worldviews and values, therefore, a symmetrical conceptual framework may be difficult to achieve. From my point of view, some societies are emphasizes on the principles of Islam and less emphasizes on the objectives of financial reporting, the proposition of accounting and definitions of accounting principles from Shari'ah principles. Thus, the different worldviews of Islamic perspective affects the information needs of an Islamic community that are different from those of a capitalist community.

Main Content

From Islamic perspective, there are at least three classifications of terminology hierarchy referring Kitabul Taarief :

Asl (foundation, eg. the compliance of Shari'ah Islamiah)

Mabda (principle, eg. halal mu'amalah, truth and fairness in the stewardship reporting, zakat focused reporting

Kaidah (rule)

In addition, some accounting principles maybe misinterpreted or interchangeable in the categorization of conceptual framework of accounting, but, these three classifications cannot be interchangeable because each classification has its fixed position.

Baydoun and Willet (2000) (Zuhaili, Muhammad. 2003) stated that the focus is on God and the society but not the individual demands, a social accountability perspective but not personal accountability from the Islam perspective. Adnan & Gaffikin (1997) and Zuhaili, Muhammad (2003) strongly suggest that the primary objective of accounting information is to giving the satisfaction of the accountability to God which is paying Zakat and to seek Allah's pleasure and not focus for material only. From my point of view, it is as a whole, not on individual. Thus, it is not reliable to individual shareholders and creditors to make decision usefulness. It is for primary users of shareholders and investors.

Other than that, SFA No.2 adopts unit measurement concept. When setting financial rights and obligation, the changes in purchasing power of money should be ignored. This concept is very important in Islam because it sacrifices the value of honesty and fairness. Ahmed (1991) and Zuhaili, Muhammad (2003) states that money as a unit of measure is incredible from Islamic perspective in an inflationary environment. From my point of view, money as a unit of measure is reasonable because it is the most relevant currency in the base money unit. The adjustments on the basic financial statements not only depend on the changes in its general purchasing power.


As conclusion, we should understand and emphasizes on the needs of conceptual framework. Thus, Islamic accounting body (AAOIFI) should have its original and uniform conceptual framework, further and deep researches are needed in order to redefine and reproduce the conceptual framework that derived from Shari'ah Islamiah.

Towards Good Accountability : The Role of Accounting in Islamic Religious



This paper discuss the issues of accounting and accountability in religious organizations, especially in Islamic religious establishments, on the conventional meaning and concept of accountability, principles of accountability within the Islamic framework, differences between the Islamic and conventional view of accountability.

Main Content

The expansion beyond the Arabian Peninsula encourages the development of a mechanism to ensuring accountability for all business transactions and for compliance with Islamic law. From Islamic Principles, every act of believers must comply ethical standards which define what is true, fair and just, the nature of corporate responsibilities, the priorities with society and accounting standards.

In Islamic religious organizations, there are less developed in accounting practices. Furthermore, accounting practices are not performed in accordance with the requirements of their religion which are to be fair, and honest towards each other.


As conclusion, Islamic religious organizations need to think about how they operate and put Islamic values in place to avoid such weaknesses.

Accounting Policy Choice Within The Shari' Ah Islami'Iah framework


This paper discuss the relation and implications of conventional accounting principles to Islamic financial institutions (Baydoun and Willett, 1994; Gambling and Karim, 1991) (Ros Haniffa and Mohammad Hudaib), the problem of harmonisation of international accounting standards in Islamic countries (Hamid, Craig and Clarke, 1993; Karim, 2001), a proposal for the formatting of Islamic corporate reports (Baydoun and Willet, 2000), a philosophical review of the ethical construction of accounting knowledge and the use of Shari' ah Islami' iah for guidance in the development of accounting theory (Haniffa and Hudaib, 2002) and accounting policy choices in a riba-free environment (Mirza and Baydoun, 2000).

Main Content

In Islamic perspective, the economic rationality, concentrating on maximising shareholders' wealth and weighing the costs and benefits of producing accounting information are often used to make decision. Besides that, the firms also likely to minimise the costs associated with contracts. This cost affects the firms' accounting and reporting policies.

Furthermore, Muslim managers must strive to provide excellent lawful products or service to society to demonstrate responsibility and accountability to Allah provide relevant and reliable information regarding all lawful and unlawful activities to demonstrate transparency in business activities.

On the other hand, the valuation method promoted to increase zakat payment above the threshold stipulated by the Hadith. The computation is based on assets rather than income. Thus, historical cost method has been used if stewardship is concerned. Why the historical cost method preferred? This is because it reflects asset values at the time of acquisition and the contracts are written in historical cost numbers. Besides that, it's also less costly and simple to understand and use. In contrary, the weaknesses occur in the historical cost system such as allocation problem and conservatism. In summary, Islamic accounting system use both historical cost and market selling prices.

From Islamic view, disclosure of accounting means disclosing information that would aid economic as well as religious decision-making and the information have to be relevant, objective and material. Full disclosure means disclosing any information deemed relevant and should be rightfully given to members of the umnah to facilitate their economic and religious decision-making. While, the 'materiality' relates to any information will indicate justice in valuation and fulfilment of the rights of Allah, society and individuals concerned.


As conclusion, Islamic accounting system use historical cost for asset valuation to satisfies the stewardship objective. And use market selling prices to calculate and paying zakat. Islamic managers have to adopt the policies comply with requirements of Shari' ah law.

Islamic Accounting - A Primer


Professional accountants always produce the accounting view that meet the objective, technical and value-free discipline, the view that related to the religious to accounting may seem unprofessional but nowadays the development of Islamic in accounting arises that bring the opportunities to the profession who truly care the public interest.

Main content

The Islamic accounting ensures the entity continuous its business in line with the principles of Islamic Shari'ah which is matching with socioeconomic objectives. Dr. Shahul Hameed, in conventional accounting, it identified, recorded, classified, interpreted and communicated economic events for users to make useful information in resources allocations. Conventional accounting focus on identifying economic events and transactions, otherwise Islamic accounting identifies socio - economic and religious events and transactions. In Dr. Shahul Hameed point of views, he mentions that the determination of profit is more vital in Islamic accounting than conventional accounting. I do not agree his point in the aspect that Islamic accounting may provide an accurate profit determination although it is holistic in its reporting. The reasons that I do not agrees his point is that the Islamic accounting measurement is depend on the economic, social, environment and religious event which sometimes from their intuition hence an accurate profit report cannot be produce and meanwhile the religious is not subject to pragmatic and logical considerations.

The Conventional accounting which mainly uses historical cost to measure and values of assets and liabilities that bring the profession to paid attention on the unit of measurement assumption of the monetary unit's limitations because the using of current value is complex and troublesome. In communist countries, the accounting profession had never developed the conventional accounting as it did not make much economic sense. Besides, Dr. Shahul Hameed, because of religious truths cannot be verified hence the revelation is not reflected a source of knowledge. Dr. Shahul Hameed & Chapra (2000) argue that sciences deal with the physical universe observable by the senses while religion deals with the higher level of reality with beyond the sense of perception.


Dr. Shahul Hameed, accounting is a device use to achieve an objectives hence it must be relevant to its purpose while achieving social welfare. Hence according to Shahul Hameed, he fully supports the Islamic accounting in achieving the socio - economic and religious objectives of Islamic institutions and Muslim users. As concluded, Dr. Shahul Hameed, Islamic institution should logically use Islamic accounting which consistent with Islamic values and norms, if the conventional accounting is used to meet the demands of a capitalist economy in these institutions an incongruence economy will result. Islamic accounting is not the only device for Islamic financial instrument but require more new areas of performance measurement including Shari'ah.

Financial Performance Measurement And Distribution Policy Of Islamic Financial Institutions


Syed Musa Alhabshi (2002), for conventional financial institutions, the interest income is the major component in reporting the financial performance, for Islamic banking the main funding activities that need to be reported is the interest - free transactions in contracts which based on Shari'ah. Next the paper discussed about the issues of financial performance measurement as well as profit distribution policy for Islamic financial institutions, adoption of conceptual analysis in the performance measurement based on existing conventional accounting assumptions and principles and evaluate it from the Islamic perspectives. The conventional loan perspective from contractual analysis, relevance of cost of funds for Islamic financial institutions and the profit distribution policy used to reduce the information asymmetry among users is highlighted. In addition the measurement of capital and income, evaluation of cash and accrual basis accounting and specifies the need for reconciliation is emphasized and discussed at the last part of the journal. Lastly, in order to ensure an adequate performance measurement and proper distribution of policy the comprehensive framework is suggested.

Main content

Syed Musa Alhabshi (2002), Belkaoui (1993), conventional perspective consisting three categories of income, they are accounting, economic and business income, they are varying in the aspects of assumptions on time period, uncertainty and the cost of nature. Syed Musa Alhabshi (2002), the relevant and reliability information for measuring the performance of an institution is depend on the economic decision making or reporting accountability which will influence the reporting functions. Syed Musa Alhabshi (2002), both reporting functions are important in conventional financial institutions by addressing the economic financial reality in decision making process and reporting past performance, the accounting information that facilitates the dual reporting role of financial institutions may produce reliable information for the reporting users. Syed Musa Alhabshi (2002), otherwise Islamic financial institutions also promotes the dual-reporting role in their accounting information but in the Islamic financial institutions the rational decision making and reporting accountability are subject to the norms and values of the Shariah which the function includes the ultimate accountability to Allah s.w.t.

Syed Musa Alhabshi (2002), in conventional reporting that are conservatism which applies the assets at lower than cost or net realizable value basis in their financial reporting but in Islamic financing, the net realizable value or cash equivalent value is the scale of measurement in preparing their financial statement. Besides Syed Musa Alhabshi (2002), Islamic financing do not take into account the revaluation of asset that are either due to the impairment or any favourable economic condition. In conventional distribution principle, the declaration of dividend is at the sense of propriety of the Board of Directors and based on the shareholding members otherwise in Islamic financing the distribution involved an Erabah contracts between the bank, the depositors and the equity holders that only realized profit can distribute to the investment account holders. However, Syed Musa Alhabshi (2002), conventional financial institutions treats the depositors earn interest as an expense while there are significant difference in Islamic financial institutions those treats the depositors earn as a distribution instant of expenses.

Besides the Islamic accounting emphasized on the cash basis rather than accruals basis this is because the profit that appear in cash basic represent the net operating cash flow which enable the Islamic to directly distributed the cash to the Zakat rather than accrual basis that they should first contributed the own money before they received the cash from somebody. Syed Musa Alhabshi (2002), in the Islamic transactions principles only the income that realized in cash can be distributed to the investment account holder which result in optimal cash flow management whereas the profit that are accruals is treat as the stability of capital that result in financial capital maintenance.


The equity holders is recommended to facilitates the accrual basis of accounting as it is a useful device in evaluating the performance measurement of the entity as whole, in addition the additional information that provided by the cash flow statement is useful for the dividend distribution and share valuation especially for the cash distribution to Zakat. The accrual basis is important to the financial institution for performance measurement because it allow the entities to provide a full disclosure financial reporting of all liabilities and provisions.

The Relevance Of IFRSs To Less Developed Economies: Challenges And Opportunities, Saudi Arabia As A Case Study


This researchers emphasize on the adoption of IFRS in an emerging country which is also the country which using Islamic rules in its national legislation. The researchers found that it is benefit for the country to adopt the IFRS rather than establishing by their own national standard. There are differences in IFRS and the Shari'ah - based rules that the conflict arises when the Saudi Arabic using the accounting reporting methods that are not permitted in the Islamic rules and influences the Islamic accounting regulations practices this is because the Islamic accounting practices is prohibited the business involvement with gambling, interest and speculation. It seems that the Saudi Arabic is proposed not to facilitates the IFRS in their reporting because the user's needs is more emphasized on the religious and cultural especially the Islamic rules.

Main content

The Saudi Arabic that support the adoption of Shari'ah rules has make a conflicts that involving the interest in their course of transactions and they refuse to admit it but treat the interest as for charity or namely "special commission" in the financial statement. In fact, the bank in Saudi should work completely its business operation in line with Sharia and avoiding the forbidden in Muslims. The conflicts arise when the enforcement mechanisms that based on Islamic laws in not important because of the main point is the ultimate accountability to Allah. They also argues that religious is not the obstacles to adopt IFRS because the political accountants and regulators are the person who influences the regulations. The study clearly emphasized that interest that exists in the business operation is not consistent with the principles of Sharia and meanwhile not compatible with the religious beliefs of Saudi society.

Zakat calculations in Saudi are not based on the standard and special financial statement but using the financial report of each company hence the zakat payment for the companies is not accurate. The objectives of Zakat is achieved when Saudi Arabic adopts the IFRS theory in the calculation of zakat by taking the fair values which is same as the principles in Sharia but the Saudi measure the zakat standard that based on the historical cost, the conflict arises because the Saudi choice to follow the Sharia principles but they still performance the measurement that are against the rules. Besides in conventional perspective the recorded of amortization is based on the fixed rate which the Sharia rules only recorded it after the items are sell and the profit is make. In valuation of financial instrument, the Islamic principles are enforcing to using the present value instant of the discounted rate.


The accounting practice in Saudi Arabia is not fully in line with the requirement of Sharia hence the limitation appear in the accounting regulations practice that also influence the religious. The researcher found that the adoption of IFRSs in developing country is acceptance and the adoption of Sharia - compliant accounting standard may create a new role for the standard setters.

Would The Objectives And Characteristics Of Islamic Accounting For Islamic Business Organizations Meet The Islamic Socio-Economic Objectives?


Rizal (2004) try to discover the objectives and characteristics of what is perceived as Islamic accounting and try to assess its problems in meeting the Islamic socio-economic objectives. He finds that a number of the suggested characteristics of Islamic accounting are suspected in meeting the objectives of Islamic perspectives.

Main Content

The arguments on the characteristics of Islamic accounting are mainly discusses in two aspects:

Disclosure and Presentation Aspects.

Islamic corporations are expected to disclose consist of any prohibited transection there had made for the year, Zakat payable and their social responsibility has been done for the year, it is more detailed than conventional accounting disclosure. They suggest that Value Added Statement should be applied which have some influence on the company policy so that the company aware of their social responsibility such as bonus payment to employees.

Financial Measurement Aspects.

Zakat is important in the Islamic perspective in dealing with the measurement of timing of the assets. Muslims is encouraged to involve in zakat as to fulfil their obligations which in line with Shari'ah of Islam. The determination and accountability of Zakat in the early accounting development had already provided by the accounting books and reports.

Based on the Mirza and Baydoun argument, the historical cost for asset, debts, firm operations and cash management is a reliable source, they also believe that concept of stewardship in Islamic accounting is well based on historical cost. But based on the Shari'ah, the historical cost will not be applied as it focuses on the current valuation method.

In Islamic perspective the contract fulfilment principles is not effective as it is assume the contract is the pass activity and they assume that the historical cost will disclosing of the truth and forbidding the withholding. However, we are suggest that the using of historical cost is applicable in reflects to the conservatism which will understated the valuation.


It would be suitable to lead an Islamic accounting system to the achievement of the Islamic socioeconomic objective of falah. Therefore, its objectives and characteristics should be able to lead the enterprise in developing an Islamic accounting system, by provide a true picture of the enterprise and to inspire them to be Ihsan (benevolence) and stopping them from being unfair and unjust.

The Implications of Islamic Jurisprudence for the International Harmonization Of Accounting Standard


Thea and David (2007) stated that, the implication of Islamic jurisprudence for the international harmonization of accounting standards has match with the development of Islamic financial institutions and accounting standards. There is the need for standardization on financial reporting practices of Islamic business organization to meet the needs of the users, such as Islamic financial institutions. The paper are discussing the differences or comparing the differences between the conventional Western and Islamic accounting standards.

Main Content

The Preparation of Financial Statements

In Islam, the well-being of the umma or Islamic community is considered primary, but for the users of Western financial statements, their primarily concern are to maximize profit and utility.

The Ban on Riba

Conventional banking is based on the interest rate spread between the depositors and the borrowers, the receipts and payment of interest is unlawful in Islamic financial transactions. For Islamic banking, riba represent the foundations of Islamic business arrangements.

Acceptable Valuation Methods

The acceptable valuation methods used in conventional Western accounting are that future values are discounted to net present value by using the discount rate (estimated interest rate). These valuation methods are unacceptable in Islamic accounting because the risk inherent in the uncertainty associated with the calculations. In the basis for financial calculations in an Islamic context, the time value of money concept is not recognized.


Lewis and Algaoud (2001) have stated that the Qur'an required the payment of zakah. The major aim of Islamic accounting standards is to find the accurate asset valuation techniques for zakah. Gambling and Karim (1991), for conventional accounting practices, assets should be valued at current market value. Islamic enterprises should be possible to select appropriate options from those available in relevant international standards in respect to accounting harmonization.

Forbidden Business Activities.

There are forbidden business activities in Shari'a compliant accounting standards such as transactions which involve in alcohol, sale of pork, pornography and any uncertain contracts, while Karim (1996) stated that in Western accounting practices, the nature of business are not important.

Recognition and measurement.

In IAS 37, the liability is requires disclosing only when these three conditions are present: i) obligation, ii) reliable measurement and iii) probability of an outflow of resources. While in Islamic standard, they only recognize when the information are available indicate an event will result in the impairment of asset.


In compliance with Shari'ah law, the Islamic accounting standards are more focused on the needs of Islamic users. The law applies to all aspects of Muslim life, including economics and business life and also accounting principles and practices. This could support or reject the suggestion that in revising conventional standards to meet the requirements of Islamic jurisprudence the subsequent standards differ substantially from their original format and purpose.

Accounting Postulates and Principles from an Islamic Perspective


The paper discuss about the compatibility of accounting postulates and principles with Islamic Law and principles.

Main Content

Accounting Entity

The business and the owner are to be viewed as separate entity, income derived from business is not deemed to be income of the owner but the business itself. The financial accounting information shows the activities of the business entity but not the owners. The postulate is accepted in Islamic though, because Muslim jurisprudence (Fiqh) is used to the idea of entity or nominal personality as it is the case for endowment (Waaf), treasury (Baitul Mal) and government.

The Going Concern Postulate

According to the postulate, except the entity has face to liquidation, it will continue for an unlimited period of time. Thus, the financial statements are only part of a series of continuous reports. However, many accountants disagreed and argued about this postulate as an unreasoning and ridiculous assumption. This assumption does not seem to reject by any of the Islamic principles because there is a principle similar to this postulate, the principle of "retaining" or "accompaniment" in Islamic jurisprudence.

From the Islamic opinion, there is a principle called conservatism principle. It states that when choosing among two or more acceptable accounting practices, some preference is shown for the possibility that has the least favourable influence on the stockholders' equity. Historical costs are acceptable if conservatism is acceptable. Thus historical costs produce misinformation. Accordingly to the conservatism principle, profits may be moved from one year to another year. Additionally, under this principle, valuation of inventories may minimize the base for Zakah. So, the conservatism principle is not well-matched with Islamic principles and rules.

The Objectivity Principle

The effectiveness of financial information highly depends on the reliability of the measurement technique used. The objectivity principle has been depending on different clarifications as it is based on evidence and it is an impersonal measure that no personal bias included. While from Islamic perspective, it is a desired principle for fairness accounting, mainly for recording different transactions.

The Matching Principle

The matching principle (or convention) states that expenses should be recognized in the same period with revenue. This is the most adequate principles for fairness accounting from an Islamic point of view. As the principle allocates expenses to their related revenues, it made the fairness and justice available to shareholders and depositors in Islamic banks at once. Without a doubt, it is the most importance in the allocating the profits in case of Islamic investment accounts when many investible funds with different maturities is formed.

The Disclosure Principle

There is a general harmony in accounting that there should be fair and adequate disclosure of accounting data. It is expected that any matter of significance will be disclosed if it would affect the decision of an average investor. From an Islamic viewpoint, adequate disclosure is also one of the desired principles for fair accounting. It provides public with useful information for making financial decisions. Zakah base value and its distribution can also be accomplished as an outcome of this principle.


Although Islamic banks and conventional banks are operate in a different way but it doesn't mean that they are absolutely different financial institutions which need different accounting. Difference accounting principles adopted by difference groups of financial institutions which their aims and objectives are also difference. Hence, all principles and procedures which keep fairness and justice are adopted in accounting for Islamic banks.

The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks


Islamic banks have to bear by the exposed doctrines in Islam in conducting their business and financial transactions. They hire in-house religious advisers-Shari'ah Supervisory Board (SSB)-who issues a special report to inform the users of financial statements whether or not the bank has followed the Islamic principles. In recent times, the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI) has been set up to externally regulate the financial reporting by Islamic banks.

Main Content

In regulating the financial reporting by Islamic banks, the FAOIBFI claims that "Financial accounting plays an important role in providing the information which users of the financial statements of Islamic banks depend on in assessing the bank's compliance with the precepts of Shari'ah. However, to perform this role effectively, accounting standards need to be developed and complied with by Islamic banks. The development of such standards must be based on clear objectives of financial accounting and agreed upon definitions of its concepts" (FAOIBFI, 1993c, para. 11, emphasis added).

After discussions which involved many difference parties such as Shari'ah scholars, it was agreed for adopting the objectives of Western financial accounting that are appropriate for Islamic banks provided that any objective violating the Shari'ah principles is excluded, for the development of objectives. According to Shari'ah scholars the practice of this approach is acceptable from a Shari'ah perspective.


Islamic banks must stand by the Shari'ah principles in their business and financial transactions. An internal control processes are set up by SSBs stated that Islamic banks have to promise users of their financial reporting that the transactions showed by the bank do not break the Shari'ah rulings.

Financial Reporting from Islamic Perspective


Accounting in conventional views is to identification, recording, classification, interpreting and communication of economic events so that the user can make use of the information to effectively and efficiently allocate their resources; whereas in Islamic perspective, accounting is a process to enable their users to assess to the entity whether the company is operating within the boundary of Shari'ah law and execute their responsibility to the social. There are some area serves as main element in Islamic accounting which is halal & haram and zakat oriented reporting style.

Main content

Different information needs of user group are listed in term of conventional and Islamic perspective of accounting has been summarized in table format as follow:


Conventional accounting

Islamic accounting


-concerned with risk inherent, return on investment and ability to pay dividends.

-help them determine whether they should continue to invest in such company.

-concerned about compliance of their investment with Shari'ah and permissibility of any dividends received.


-concerned on stability, profitability of their employers and information about remuneration, retirement profit and employment opportunities.

-concerned permissibility of the activities that give rise to their remuneration, retirement benefits and employment opportunities.

-whether entity offers a working environment that is conducive to practicing their faith


-concerned on information that helps them to determine paid back ability of their debtors when the debt is due.

-how contractual differences between a Shari'ah compliant financing transaction and its conventional counterpart would affect their risks and returns.

Suppliers and other trade creditors

-concerned on information that determine the paid back ability of their debtor over short period than lender.

-know whether the items they supply would be utilised for permissible purposes


-concerned on persistence of entity especially when they have a long term participation with or reliant on the entity.

-concerned on information influence Muslim customers' purchasing decisions.

-e.g. Muslim users may not wish to consume goods and services from an entity or a group that also operates haram activities

Governments and their agencies

-concerned on allocation of resources and activities of entities and taxation policies of the entity.

-help assess zakat on business and monitor the level of permissible and non-permissible income and

activity of an entity


-concerned on information about the trends and recent growths in the success of the entity and the range of its activities.

-require information on an entity's contribution to their community, and how accommodating an entity is to their religious sensibilities.


To be relevance and reliability, the information should be influences the economic decision of user and they should depend on the information presented, however it is subjective. For example, an item described as 'finance income', when disaggregated into permissible and non-permissible income, may influence the economic decision of a Muslim user, while a non-Muslim user may be indifferent to the disaggregation. Thus, what is relevant to the Muslim may be irrelevant to the non-Muslim. Shariah permits the use of persuasive evidence in the absence of conclusive evidence10. Where persuasive evidence has been used, it may be appropriate to include additional disclosure on the assumptions underlying the estimates and judgements.

3.0 Critical Argument on Reliability and Relevance in financial reporting from

Islamic and Conventional Accounting Perspective

The issue of reliability and relevance of information being disclose in the Islamic and conventional reporting being discuss in our assignment. Conventional accounting practice has develop a standard international set of accounting practice which have been widely adopted by various country but the problem arising for Islamic country. Islamic countries are relying on Shari'ah law in developing objective of falah which mean to the success in the world and hereafter. Many concept explain above that propose and implemented by the conventional accounting are found not appropriate for Islamic accounting due to the prohibition of interest, involve in stock exchange which serve as gambling in Islam and also speculation. Besides that, there are difference between objective of conventional business and Islamic business.

Normally, profit maximization are the main objective of non-Muslim organization, whereas such objective of Islamic organization are mainly social oriented which mean that profit is their secondary profit and social responsibility is their primary objective. A firm to be recognizing as success from Islamic perspective is view from amount of social activities had been done for the year rather than amount of profit has been earned. Islamic accounting assumes that all people are act honestly and faithfully as they are believed in Allah has watching their act. Zakat is the main concern in Islamic accounting which is a tool to establish objective of equally distribution of wealth in Islamic religious. Some concepts in conventional accounting are argue and disagreement by Islamic research mainly from the view of Zakat. For example, conservatism theories are saying to mislead the financial position of a company and thus lead to underestimate the amount of Zakat.

From our group's point of view, Islamic accounting may not effectively show their reliability and relevant in their way of presenting their financial statement as we are disagree some conceptual framework proposed by Islamic accounting. Although they argue that the information prepare are not mainly for the investor or even their creditor but provide mainly for computation of Zakat. We think that this may not fair to other user of the statement especially for the investor that heavily rely on the financial statement in making decision. We can't assume all investor of Islamic company are Muslim! E.g. If a country didn't open their trade to the world, they will stay in their border forever and can't even move on to better life! We think that in order to ensure better economic which lead to better social life, Islamic organizations should open their arm to the world and follow the step of the world. This would make an improvement to countries economic and increase the employment rate. If people get job, they can enjoy better life. Remember that God won't blame you to make good life for others! We think that by doing so, Islamic company can even perfectly execute their responsibility toward social or poor people.

In term of argument for historical cost and current cost, we are agree with Islamic

Writing Services

Essay Writing

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.