Islamic Accounting

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial statements Pages: 11 (3545 words) Published: December 17, 2012
The Principles of Islamic Accounting

Definition and discussion of some accounting principles and how they are fit into Islamic framework to furnish an accounting system and procedures for Islamic Financial institutions will be considered here. The plan to study accounting principles From an Islamic perspective is to review these principles from the viewpoint of the Major Islamic principles which govern financial dealings and contracts, as mentioned In the Qur'an. These are:

1- Realization of fairness and justice.
2- Preservation of the rights and dues of all parties.
3- Paying Zakah (that necessitates having accurate and just financial statements.

Which represent accurately and truly the financial position of the entity). The first two Islamic principles are emphasized by the Holy Quran. It is instructed that measure and weight should be given with justice and without withholding from people what is theirs (Qur'an, 6:152, 7:29, 11:85, 17:35, 55:9, 57:25). Muslims also are asked, when dealing in financial transactions involving further obligation (debt), to write down faithfully and precisely this obligation (Qur'an, 2:282). Therefore, Accounting which helps to keep and record the rights and dues of all parties' is required in Islam. It represents an integrated part of the just system which Islam Requires. Therefore accounting principles in a Muslim Community should be formulated so as to provide fair and just information. On the other hand Zakah is one of the five pillars of Islam. Qur'an requires Muslims with a specified minimum wealth (Niscib) to pay Zakah (12:41, 78; 24: 56; 33: 33; 58:13). The rate of Zakah varies according to the type of wealth. Zakah revenue is earmarked to be spending on certain items detailed in the Qur'an (9:60).

2.1 The Objectivity Principle

The usefulness of financial information depends heavily on the reliability of the measurement procedure used. Because ensuring maximum reliability is difficult, Accountants have employed the objectivity principle to justify the choice of a Measurement procedure. Financial reporting is considered useful if it provides useful Information to present to potential investors, creditors and other users, on which to Base rational investment, credit and similar decisions. The principle of objectivity has been subject to different interpretations as below:

1- An objective measurement is a verifiable measurement in the sense that it is based on evidence. 2- An objective measurement is an impersonal measure and free from the Personal bias of the measurers.

The development of new ways and means for realizing objectivity is particularly needed in the present situation of inflation. Although historical cost, for example, Realizes objectivity for recording values of different items at their acquisition, it does Not maintain the same if used as the basis for valuation. Therefore, it is essential to Differentiate between measurement objectivity and valuation objectivity.

The objectivity principle, from an Islamic point of view, is a desired principle for Fairness accounting, especially when recording different transactions, i.e. assets, Goods and services at the price prevailing during the date of acquisition (historical Cost). However, objectivity turns out to be anything but objective when valuation is taken according to historical cost in an inflationary environment. Therefore, the Objectivity realized by using cost price at acquisition date is not necessarily achieved when valuation is made at a later date. As a result, it is believed that objectivity can be accepted for recording transactions at the prices of the date of acquisition in Islamic Financial institutions. However, in certain circumstances it yields non-objective Information. Therefore, other methods of valuation, e.g., current value, should be adopted. Difficulties embodied with alternatives should not prevent the acceptance of the need for change. Indeed, it is believed that...
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