The Differences Between Conventional and Islamic Accounting

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THE DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC ACCOUNTING

ABSTRACT

The concern of this project paper is to explore the differences between Islamic accounting and its conventional counterpart. The distinctions need to be addressed as both accounting is presently thought of many people as synonymous. There is danger for such kind of perception because the basic building blocks for respective accounting are worlds apart. As for professional accountants who have been taught on the idea for accounting to be ‘objective’ and value-free, the idea for attaching a religion may seems to be embarrassing and unprofessional. However, with the resurgence of Islam globally, the awareness for the need of Islamic accounting arises. Islamic accounting as a whole is able to serve the whole gamut of stakeholders. Its principles do not serve the interest of any particular group, but to the society as a whole which can make corporations accountable for their actions and ensure they comply with Shariah principles. 1.0              Introduction

It is widely accepted that the primary objective of accounting is to provide useful information to assist users in making economic decisions. Thus, it can be argued that accounting is therefore, a religious obligation. Hence, if accounting is a religious obligation, then the rules of accountability must be purely divine. In order to do so, appropriate accounting framework based on Shariah principles must be in place. The motivation for the development of Islamic accounting comes together with the emergence Islamic economic and Islamic resurgence for the last two to three decades. The awareness for the need for Islamic accounting is due to basic building blocks of conventional accounting itself since the International Financial Reporting Standards (IFRS) are based on interest-based elements. Because of the interest-based requirement, the conventional accounting adopts the ‘historical cost and conservatism concept’ in order to ensure whether the capital and interest are repaid. This is one of the elements embedded in the conventional accounting which is already violating the requirements of Shariah. As an alternative accounting system, Islamic accounting is gaining more recognition, especially by Islamic countries. It is necessary to have Islamic accounting to be in place rather than conventional accounting in order to provide information on financial success in Islamic organisations. The Accounting and Auditing Organisation For Islamic Financial Institutions (AAOIFI) was formed for this reason. To this date, AAOIFI has produced a set of accounting standards that could represent a benchmark framework that draws rationales from the Shariah. Islamic accounting can be initially defined as the “accounting process” which provides appropriate information (not necessarily limited to financial data) 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 its socioeconomic objectives. Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to God (in respect of inter-human / environmental transactions).The meaning of Islamic accounting would be clearer if we compare this with the definition of ‘conventional accounting’. The conventional accounting as we know it is defined to be the identification, recording, classification, interpreting and communication of economic events to permit users to make  informed decisions (AAA, 1966). From this, it can be seen that both accounting systems set out similar objective of reporting. However, the differences lie in the following;

      The objectives of providing the information;
      The type of  information is identified;
      How the information is it  measured, valued, recorded and communicated; and       To whom will the information be communicated (the users).

At present, AAOIFI has no legal backing. Only few...
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