Islamic Accounting



Islamic Accounting

Introduction

The financial statement of a company represents an important source of information when making strategic financial decisions. The balance, among others, is a financial statement to provide a realistic picture of current and future economic potential of a company. The reliability of these states is of utmost importance for shareholders, customers, partners of these institutions but also for regulators and control (Cizakca, 2011).

In the case of Islamic finance, financial accounting is important to standardize and ensure smooth integration between the various parties involved in banking. Islamic accounting provides the information that users of the financial status of Islamic banking depends to evaluate both the financial health of their investments and their compliance with Sharia principles. Hence there is important need for standardization of Islamic accounting standards to facilitate the use of these standards and allow the market to work seamlessly and efficiently (Venardos, 2010).

Islamic Accounting and Standards

The standards established by the Office of International Accounting Standards Board (IASB) are applied by the vast majority of Islamic financial institutions worldwide. Indeed, there are many similarities between Islamic and conventional accounting systems, financial statements balance sheets of the two systems are defined by the assets and liabilities of the company (Venardos, 2010). The asset side, we find the current assets and fixed assets in the long term, whereas the liabilities side, but with the short-term liabilities and clean background. The general rule of the financial statement balance sheet is that assets should always equal liabilities plus any equity (Fahim & Porzio, 2010). However, due to the nature of the same transactions conform to the Islamic Sharia; they must consider the ethical dimension based on the precepts of the Quran and the Sunna. This dimension requires that we include in the calculation of the performance of an investment of non-financial criteria such as environmental conservation, respect for human dignity or respect for philosophical or religious requirements (Archer, et.al, 2002). Thus calculations are not only based on economic transactions and events as is the case in the conventional system, but also on religious events and socio-economic transactions.

Although Islamic accounting standards are based primarily on international accounting standards (IAS), the information usually included in the financial statements are Islamic measured, valued, recorded and reported differently. Thus, for example, to calculate the amount of Zakat, the assets should be measured in contemporary terms, not in the historical cost (Venardos, 2010). And in order to fulfill their social obligations in their individual contracts, Islamic organizations may use different statements reducing the emphasis on profits by the income provided by conventional accounting (Archer, et.al, 2002). In addition, to evaluate companies that make money in an ethical manner and in accordance with Islamic Sharia principles, and they deploy their resources in a profitable manner, the financial statements should provide additional information, such as liquidity, solvency, risk pricing and their contribution in carrying out social responsibilities, which may include environmental protection and contribution to charitable activities (Jackson-Moore, 2009).

Growth of Islamic Accounting World Wide

The collapse of financial markets in ...