Separate Business Entities: Conventional and Islamic

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  • Topic: Corporation, Types of business entity, Legal entities
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  • Published : December 10, 2012
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Separate Business Entity – Conventional And Islamic.
Nazrin KB
Bismillah Ar-Rahman Ar-Rahim
The manner of this short essay is that it will discuss my findings regarding the generally accepted accounting concepts and principles a.k.a. the GAAPs that most accountants and professional accountancy bodies worldwide have, in unison, established to be the essence of the most ordinary way of businesses treating their everyday activities within the scope of accounting. All businesses do have in their rights the ability of creating their own method of dealings with their own personal accounting treatment, but they should, in some degree, declare the reasons as to why they opted out for using the normally accepted accounting treatments. In light of that, I will then try to comprehend what have most Islamic scholars and jurists have their say in this topic, whether or not this particular GAAP is within the Syariah of Islam. The topic in discussion is the conventional ‘Separate Business Entity Concept’. Before going any further, some clarifications ought to be pronounced. There are two ambiguities here as to how most common students and of those that are illiterate in accounting in general have mistakenly understood by this concept. It is only fair that I state these two because I myself was initially intertwined with both of the ambiguities. I will start by articulating the most basic understanding of the concept. Accordingly, owners and their business are two very distinct character or entities; meaning that you cannot count Mr J and J Enterprise to be of one entity or body. What this concept further implies is that Mr J and J Enterprise is of the relationship of a debtor and a creditor; meaning that initially, Mr J had injected his own personal money into J Enterprise to start the business namely the capital, and J Enterprise should therefore treat Mr J as if it owes Mr J money. Throughout the course of an accounting period, Mr J can rightfully take from J Enterprises whatever he wishes, be it cash or any other physical things, and that is called drawings. J Enterprise is thus fully able to acquire personal assets and lands, and hold liabilities; it is very much in distinction with Mr J. Furthermore, J Enterprise can also sue others and be sued by others, hold contracts with other businesses, responsible for taxes to the government, hold properties under its name, and ultimately can be declared bankrupt as any other human being can. This understanding of this concept is applied to all types of businesses, namely sole traders, partnerships and companies. Just for the sake of this discussion, pretend that J Enterprise would eventually be large enough to become a limited company with the name J Ltd. What normally happens is that in a limited company there is a group of people who purchases portions of J Ltd, which are called shares, and those people can now to a degree be called one of the owners J Ltd. A collective of them is termed shareholders. Now, as J Ltd and its shareholders are two very distinct entities, in the case of J Ltd gaining profit, all the shareholders will enjoy a certain amount of the profit under the term of dividends. The division of profits amongst the shareholders are directly proportional to the amount of shares each shareholder initially invested inside J Ltd. But, in the case of J Ltd experiencing loss or liquidation, the shareholders will bear no more liability to the settlement of all J Ltd.’s debts to its creditors to the extend only that which the amount they initially invested in, just like with dividends. J Ltd.’s creditors cannot demand from the shareholders of J Ltd for remedies no more than the amount of which the shareholders have invested initially in J Ltd. These two paragraphs highlighted the two ambiguities that were aforementioned. The first one is that in all types of business, from sole traders to the most complex public limited companies, the owners and the business are two very...
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