Islamic Accounting

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BASIS OF INCOME RECOGNITION FROM ISLAMIC PERSPECTIVE
Yosita Nur Wirdayanti

ABSTRACT This paper addresses the issue of basis of income recognition from Islamic perspective. In Islamic banks, income recognition is very important since it will determine amount of profit that will be distributed to depositors. Begin with accounting principles from Islamic perspective, this paper discusses the concept of accrual and cash basis and scholar opinion about this basis of accounting. Both accrual and cash basis implementation with its advantages and disadvantages also discuss in this paper. An alternative method to improve fair and just between bank and customer is proposed.

1. Introduction The growth of Islamic financial market and institution create the need for different accounting requirement. This is because Islamic Financial Institution (IFI) has distinctive features from conventional financial institution. The recording not only has to facilitate transactions happen in IFI, but also has to meet Shariah compliant. A lot of issues rose for accounting and control of IFI. One of the issues is accounting basis of income recognition.

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 (in respect of interhuman/environmental transactions).1

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Shahul Hameed, Accounting and Auditing for Islamic Financial Institution, page.2

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In conventional banks, how they recognise the income does not affect the distribution profit to the depositor. They use interest mechanism, give interest to depositor and receive interest from debtor. Unlike conventional banks, Islamic bank are not operated with interest mechanism. It is operated with buying and selling basis, profit and loss sharing or leasing. It is a financial intermediary between investors and entrepreneurs. How much the depositors will get their return depends on how good Islamic bank generate profit. Therefore, income recognition in Islamic Banks will affect their profit distribution to their depositors because different income recognition basis will give different implication for all the parties involved.

Accounting recognition refers to recording the basic element of the financial statements. The concept of accounting recognition define the basic principles that determine the timing of revenue, expense, gain and loss recognition in the bank’s income statement and, in turn, the basic principles that determine the timing of assets and liabilities recognition. The concepts of accounting recognition also determine the timing of recognizing profits and losses resulting from restricted investments in the statement of changes in restricted investments.2

Currently, there are two basis of recognition in accounting, namely cash basis and accrual basis. The characteristic of each basis will be discussed in the next section. The issue is which one that should be the basis of income recognition from Islamic perspective.

2. Accounting Principles from Islamic Perspective

There are three major Islamic principles mentioned in Qur’an which related with financial dealings and contracts. These are: • • •

Realization of fairness and justice Preservation of the rights and dues of all parties Paying zakah (that necessitates having accurate and just financial statements which represent accurately and truly the financial position of the entity)3.

AAOIFI, Statement of Financial Accounting No.2 Eltegani, Accounting postulates and principles from an Islamic Perspective, Review of Islamic Economics. page. 9 3

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The first two Islamic principles are emphasized by the Holy Qur’an. It is instructed that measure and weight should be...
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