Comparative Accounting: Islamic vs. Conventional

Since there is a prohibition of interest – “Riba” (Arabic) in Shari ’a compliant transactions, new accounting standards for an Islamic accounting have been created.

Today, we are able to use AAOIFI standards, Shari ‘a rules and part of the IFRS standards or local GAAP (Generally Accepted Accounting Standards). AAOIFI (Accounting Auditing Organization for Islamic Financial Institution), based in Bahrain, is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari ‘a standards for Islamic financial institution. It is responsible for developing and issuing standards for international Islamic finance industry and is supported by over 200 institutional members from over 40 countries. AAOIFI standards have introduced greater harmonization of Islamic finance practices across the world and there are expertise for technical application of standards such as Certified Shari’a Adviser, Auditor (CSAA) and Certified Islamic Professional Accountant (CIPA). The founding members are: The Islamic Development Bank, Dallah Al Baraka, Faysal Group (Dar Al Maal Al Islami), Al Rajhi Banking & Investment Corporation, Kuwait Finance House and Albukhary Foundation.

AAOIFI’s set of financial statements, similar to conventional financial statements include: Balance sheet,  an income statement, cash flow statement and statement of retained earnings. Statements unique to Islamic financial institutions are: Statement of changes in restricted investments, statement of sources and uses of funds in the Zakah and charity fund and uses of funds in the Qard.

  • Similar to conventional to Financial Statements
  • Income Statement
  • (Profit and Loss Account)
  • Statement of Retained Earnings (Statement of Changes in Owners’ Equity)
  • Unique to
  • Islamic Financial
  • Institutions
  • Statement of Changes
  • In
  • Restricted Investments
  • Statement of Sources and Uses of Funds in the Zakah and Charity Fund
  • Statement of Sources and Uses of Funds in the Qard

Differences between conventional accounting and Islamic accounting are the following:

CONVENTIONAL ACCOUNTING ISLAMIC ACCOUNTING
Limited disclosure (provision of information subject to public interest) Full disclosure (to satisfy any reasonable demand for information in accordance with the Shari ’a)
Personal accountability (focus on individuals who control resources)  Public accountability (focus on the community who participate in exploiting resources)
Economic Rationalism Unity of God
Secular Religious
Individualistic Communal
Profit maximization Reasonable profit
Survival of fittest Equity
Process Environment
Absolute ownership Relative ownership
Individuality –oriented Society oriented
Focus on individuality aspect without considering of any social aspects Focus on society aspect
Accounting Law and Ethics Basically Al Qur’an & Al Sunnah (Sharia’h)
Secular Religious (responsibility to God at the Judgment Day)
The normative accounting always influencing descriptive accounting or individuality interest

 

No differentiation between Normative and Descriptive Accounting (They are always going simultaneously)
In operational, they permit everything to reach the highest profit In operational, they do everything in boundaries of Islam (Sharia’h)

 

Measure as highest possible profit Measure as saleable value

 

Historical Cost Market (selling) price rather than historical cost

References:

Deloitte Global Services Limited (2015), “Islamic Accounting“, UK, Retrieved from web on May 31st, 2015: http://www.iasplus.com/en/resources/topics/islamic-accounting

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (2006-2014), “Developing Islamic Accounting and Auditing Thoughts”, Retrieved from web on May 31st, 2015: http://www.aaoifi.com/en/about-aaoifi/our-history.html

Basic M. ( 2015), “Comparative accounting Lesoon 1“, Presentation, Sarajevo, B&H.

11. 7. 2018, Sarajevo                                Berina Mulabegović, MA

Related posts