The Introduction To Islamic Accounting Accounting Essay

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The purpose of this paper to explore the possibility to look for a new accounting theory and accounting standards setting mechanism under some of Islamic principles.The paper has discussed basic Islamic principles of "Amanah" (Custody), "Shahadat" (Testimony), settlement in "Bay" (business deal) and "Shura" (Counseling) in the context..

As the accounting standards setting process will be based on Divine Guidance (Quran and Sunnah), the extent of subjectivity in setting and applying accounting standards can be minimized. These are initial thoughts. An accelerated integrated effort at OIC (Organization of the Islamic Countries) level to further explore the principles, specially "Bay", may be very useful.The new set of accounting standards would have a wide scope and just not be limited to Islamic finance. The paper provide an insight for another set of accounting standards which may improve the present status of accounting profession.

Research Objective:

The research objective is to find out the importance of Islamic accounting as compared to conventional accounting standards. Thus an effort is made to find out the various features of Islamic accounting along with the benefits and its comparisons with the conventional accounting system.

Research Problem and questions:

The research problem includes the facts that specify the benefits of Islamic accounting as compared to conventional accounting systems. The questions include the followings.

What is actually the Islamic accounting system?

What are the benefits of Islamic accounting system?

How this is different from other accounting system?

Research Source of data:

The data will collected from primary sources via questionnaire and secondary sources like previous studies and researches, book and magazines, and online resources.

Scope and limitations:

The scope of this research is only to the extent of thisparticular Islamic accounting study in comparison to the conventional accounting standards. The main variables that the researchers will look into are:

Government Regulations,


Methods and companionship to deliver such accounting standards.

Significance of the study:

This study will come in handy to serve other manufacturing companies and any related parties Thus; it will be significant for the general public, students of finance and potential customers of banks, investors, and may be useful for researchers.

Definition of terms

Islamic accounting can be defined as the accounting process which provides appropriate information to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shariah and delivering on its socioeconomic objectives. Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to God. The meaning of Islamic accounting would be clearer if we compare this with the definition of conventional accounting. Conventional accounting as we know it is defined to be the identification, recording, classification, interpreting and communication economic events to permit users to make informed decisions (AAA, 1966).

Literature & Related Studies II Chapter

Chapter two

Literature Reviews:

1- The Accounting and Auditing Organization for Islamic Financial Institutions: An Important Regulatory Debut

Felix Pomeranz (1997);

AAOIFI or the Accounting and Auditing Organization for Islamic Financial Insitutions has made a vital regulatory requirements for the business. Actually this Bahrain based organization had seek to work as per the faith in Islam. Thus they developed accordingly accounting standards with Islamic investment vehicles and methods. For this purpose they have also introduced various training and publicity methods. Thus with the development of Sharia principles and as per the direction of the committees of Sharia the new Islamic accounting method with new principles have come into being.

Although few people have complained about the structural problems with the Islamic banking systems, but the maximum people have agreed to used these newly defined Islamic terms and process in accounting and make the Islamic Financial Institutions work under Islamic laws and regulations.

Some people believe that the Islamic deposits are for short period and they do not match long term requirements. This is due to the fact that there is absence of sufficient number of wealth depositors in the country. Moreover the earning expectations has also increased with the inability of many banks to borrow from other banks.

Still the Islamic Accounting helps in project financing, economic development and monitor of various project planning and execution process is made easier. Thus it works more for the employee welfare and provide lender exercise proactive control over the investments so that he can withdraw them whenever he feels them unsafe.

2-The Level of Compliance with AAOIFI Accounting Standards: Evidence from Bahrain

Adel Mohammed Sarea (2012

The main purpose of this article is to find the various attitudes of accountants about the compliance with the Islamic Accounting methods as per the AAOIFI or the Accounting and Auditing Organization for Islamic Financial Institutions. Thus they help in understanding the basic principles as per the standards of IFIs or the Islamci Financial institutions.

At present the IFIs has proved themselves to be the fastest growing sector not in the local but at the global levels also. They review the current framework and along with that keep a check on the level of compliance as per the requirements of the AAOIFI accounting standards.

Thus we found out that the Islamic banks of Bahrain has fully ascertained the use of all the compliances and regulations as per the AAOIFI. This has helped in understanding the conceptual framework of the organization. This way it has been proved that the Islamic compliance at present has taken over the imported compliance, and has proved their worth.

Earlier the studies used to focus on the understandings and acceptance of the AAOIFI compliances and regulations and built accordingly the accounting standards. But the level of compliance have changed is some places. Like some have shown high, others as medium while the left out has shown lower acceptability of the compliances.

In the recent years due to high growth rate of the Islamci Capital Market or the ICM, their has been a lot of pressure under AAOIFI to help the organizations and specifically Islamic banks to follow the accounting process as per the compliances. The data collected shows that all the rules and regulations are well followed by these organizations in Bahrain. Not only because they are mandatory but they are very useful.

3-The need of accounting standards for Islamic financial institutions: evidence from AAOIFI

Adel Mohammed Sarea and Mustafa MohdHanefah (2011

According to this article the need of Islamic Accounting Standards is very important. That is the very basis of the article is to help the stake holders of a company to analyze their present market situations and figure out the ground realities from the accounting standards and regulations followed in the yearly statements of the companies. Thus the AAOIFI confirming the use of Islamic Accouting and Auditing method has helped the investors to find out what is the present situation of the companies and take their decisions accordingly.

Thus from this study it is quite clear that the investors are happy and confident when they see the Islamic accounting method being used in the Yearly statements of accounts of the companies which help them draw easy and quick decisions regarding continuing their investments in the companies. Thus the this reflect the unique feature of IFIs and its usefulness to the people on various needs. The major challenge that has been discussed is the financial statements of the companies. These companies feel hesitant in the earlier stage but later found out the benefit of such Islamic Accounting method. They found that actually by giving clear and concise picture of the real situation they can actually attract more customers than by just keeping quiet.

Thus by adopting these Islamic accounting principles as per the AAOIFI accounting standards and IFRS has become focus among the IFIs. Thus the main objective that is to show the clear picture of the business, developing similar auditing methods and corporate governance has become easy.

Thus now it has been recommended in many companies in Bahrain. Not only that many Muslim countries around the world are also taking steps to adopt the various rules and regulations under the AAOIFI.

4- IFRS vs AAOIFI: The Clash of Standards?

Mohamed Ibrahim, ShahulHameed (2007)

The need of the Islamic financial industry is not only to get a standardized set of rules and regulations to different of businesses and financial institutions but also corresponding accounting standards. These standards needs to be developed as per the industry requirements. Such an attempt has been made in 1991 when the IFI was established under AAOIFI.

The IASB however reconsidered the positions and offered various alternates that could help in developing different kind of reporting requirements from small to big businesses as the case may be.

These Islamic banks and other financial companies are not interested in developing their market presence in the capital market, but also they want to become the part of the intermediate system that is important for the economic benefits of the company.

Thus this convergence of accounting standards as per the IFIs norms and regulations administered by AAOIFI proved to bring hegemonic tone of standardization, which can seen through the International reporting standards of the financial reporting systems of other countries which cannot state that they comply with the International reporting standards as administered by the IFRS and GAAP.

The critical Accounting theorist like Tinker and Puxty called this kind of Islamic system of accounting to be a more emancipator accounting as compared to the global warming and other issues related to the environment. Thus they have resulted in calling the sustainability reporting as Global reporting initiative important along with the Social and Environmental Accounting.

Evaluations of the study:

From the above study it's clear that the Islamic Accounting is far way better and trustworthy accounting system. In this Accounting system all the flaws of the Conventional accounting system are drawn away and a good method of depicting the true picture of the accounting statement can be achieved.

ResearchMethodologyIII Chapter

Chapter three

Research Design

The research is designed in the form of the questionnaires and other secondary sources of data. The attempt was made to keep secrecy and clarify the questions to the respondent before the filling of questionnaire. Also the interview questions were designed to maintain secrecy of the identity of the person.

Sources of Data

There are twotypes of data in any research, primary and secondary data. In this reportthe researchers have used the primary source of data through distributing questionnaires along with secondary source of data.

Purpose and research questions or null hypothesis

The purpose of the study is to find out the benefits of the Islamic banking and compare it with the conventional banking system and find out if really the Islamic banking system a better system than the other one.

Sample Size:

The sample size consists of 30 respondents. These respondents are the Chartered Accountants with the knowledge of both Conventional and Islamic accounting system. Along with that the accounting lawyers were also among those who were consulted.

Scope and limitations

The scope of the research is the evaluation of the Islamic accounting system. No other sample shall be used to conduct this research. The research is done as the researcher must submit the study results before the end of the course to pass the course requirement.


What is your designation?

How many of years of experience in accounting you have?

What is your age?

What is your gender?

Do you know about the Islamic accounting system and conventional accounting system?



Do you think Islamic Accounting systems are better than Convention Accounting systems?



Do you think that Islamic Accounting system should be made compulsory for all the organization?



Do you think that Islamic Accounting is the answer to all the organization problems that investors, government and other parties faces in terms of transparency?



How you grade your knowledge about Islamic Accounting system?

Very Good.



Below Average.

No Knowledge.

Suggest any drawbacks or improvement you want to be added in Islamic Accounting system?