The Principles Of Islamic Economic System Accounting Essay

The chief component of Islamic societies is the limitation on the usage of involvement. As a consequence, this has deduction for accounting patterns of a house that complies with the demands of the Islamic jurisprudence. In this research paper, I focus the deduction of involvement prohibition on the house ‘s accounting and coverage policies.

Several surveies emphasize the prohibition of involvement in Islam. However, they stop short of placing the accounting deductions of prohibition on the usage of involvement. The prohibition of involvement besides means that the usage of price reduction rate is forbidden. Because the hereafter is in the custodies of God Almighty, the followings of Islam do non foretell the hereafter. The usage of price reduction rate basically involves foretelling the hereafter. Islamic bookmans have questioned the usage of methods such as net present value in ciphering the value of an plus that require foretelling the hereafter. It besides means that the usage of unsecured bond and other loans with involvement is non allowed. Therefore, the balance sheet of an Islamic house is likely to except unsecured bonds, penchant portions and involvement.

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Abdallah ( 2001 ) says that Islam considers the usage of involvement as development of borrowers by the loaners. The accounting system should non take to the development of one group of people by another. Therefore, the purpose of accounting in Islamic community should be to conform to the prohibition of involvement. Muslim directors are hence to follow rules that best accommodate the involvements of the house ‘s claimants, with the minimal cost involved.

2.0 The rules of Islamic economic system.

A major rule of an Islamic economic system is the rule of God ownership of resources. In Islam God is the exclusive proprietor of wealth and people are legal guardians. Harmonizing to Mirakhor ( 2007 ) the Islamic jurisprudence specifies the significance and the manner of accomplishing answerability. In this regard people are separately accountable for their actions with what they have been trusted with on the Day of Judgment.

In Islam the relationship with God is defined by the construct of integrity or unity of God. This construct implies entire committedness to the will of God ( Mirakhor 2007 ) . He besides emphasizes the person ‘s function in a broader societal context and the duty non to profit at the disbursal of others. Parties in concern must be legitimate, merely and just and accomplish a sensible degree of net income. Excessive net income is considered as tantamount to development. Islam gives penchant to the demands of the community over those of persons. Whenever the demands of the God struggle with those of persons, those of the God must come foremost. Firm directors in Islamic societies are likely to follow policies that are consistent with the demands of the jurisprudence. Directors are besides likely to utilize accounting and coverage policies which maximize the value of the house “ within the regulations of the jurisprudence.

This does non connote that persons should non work for their ain improvement and can non go rich. In Islam going well-off is absolutely acceptable every bit long as the wealth is generated through following with the demands of the jurisprudence.

Abdel ( 1999 ) says that Islam requires its followings to subject to God Almighty and unrecorded merely, but it does non propose that persons ignore their opportunism. In relation to the houses, Islam recommends a sensible net income border and non inordinate. It advocates the usage of patterns such as handling employees good, functioning the community in which the concern operates, and trading in desirable, quality merchandises. Trade in an Islamic society is conducted, as elsewhere, through contracts, implied every bit good as explicit. The usage of involvement bearing loans is avoided. The usage of involvement in personal or concern minutess has ever been a beginning of contention in Muslim societies. For illustration, a major concern agreement that avoids the usage of involvement is called the Mudaraba ( Abdel 1999 ) .

Harmonizing to Abdel ( 1999 ) mudaraba contract is a legal guardian funding contract, where one party, the moneyman, entrusts financess to the other party, the enterpriser, for set abouting an activity. In mudaraba contracts the agent for illustration a bank receives a specified portion of the net income originating from puting the financess provided while the investor bears any losingss. He goes on to state that investings are considered restricted if the provider of financess restricts the usage to which the financess can be put, otherwise the investings are considered unrestricted. In a Mudaraba contract, net income is divided between the investor and the agent in a ratio agreed upon at the clip the contract is negotiated.

3.0 Argument about the usage of involvement.

Harmonizing to the Islamic jurisprudence, involvement is purely out because it leads to a concentration of wealth in the custodies of a few. Those who benefit from involvement shall be raised like those who have been driven to madness by the touch of the Devil ; this is because they say: Trade is similar involvement while God has permitted trade and out involvement. Hence those who have received the warning from their Lord and desist may hold what has already passed, their instance being entrusted to God ; but those who revert shall be the dwellers of the fir and abide therein forever ( Abdel 1999 ) . These suggest that the usage of involvement is disallowed.

Harmonizing to Yue ( 2008 ) the usage of involvement violates the rule of societal justness, which underlies all economic activities in Islam. All wagess must be the consequence of attempt. Interest minutess lead to honoring people without them doing the attempt and this is out in Islam. One of the implicit in constructs of the Islamic economic system is growing with equity ; the usage of involvement clearly is in direct struggle with this construct. He goes on to state that prohibition of involvement is related to Muslims ‘ attitudes to the clip value of money. Some scholars have suggested that the construct is non acceptable to the Islamic jurisprudence. However, this position is non shared by all Islamic scholars.

4.0 The accounting deductions of involvement prohibition

Chalmers ( 2007 ) say that there is a demand for developing a set of criterions for Islamic accounting and coverage. The demand for accounting criterions is non really different from the demand for any other sort of criterions, whether it is criterions for weights and steps, or criterions for vesture sizes, classs of beef, or baseball statistics. In fiscal accounting sometimes we tend to believe merely in footings of investing determinations, but those are non the lone determinations for which fiscal information may be utile, if non critical.

The demand for developing accounting and coverage criterions becomes pressing for houses in the Islamic societies as the Islamic universe efforts to resuscitate the Islamic political orientation. Furthermore, if a consensus is achieved on the criterions, so the overall clerking costs of the houses are likely to be minimized. The issue that is still being debated in the literature is how to develop an Islamic accounting system. Is it on the footing of the international accounting criterions, or other criterions, is it on the footing of what is being practiced by Muslim houses, is it on the footing of the Islamic jurisprudence or is it on the footing of a Combination of any of the above?

In recent old ages, a subdivision of accounting literature has developed that high visible radiations the differences between Western and Muslim concern environments. Get downing from the premise that Islam disallows the usage of involvement in any form or signifier, it is suggested that a separate and distinguishable system of accounting and coverage demands to be developed. The chief differences compared to Western fiscal statements are likely to be in the intervention of certain points in the balance sheet. A major conceptual difference is in the particular intervention of unrestricted mudaraba and other investings as a individually identifiable class of assets and fund histories, which have partially the features of equity and partially that of liabilities.

The notes to the histories are besides likely to incorporate inside informations of fiscal outgo dispatching the houses ‘ societal duties. Firms exist because it is dearly-won to utilize the monetary value system to organize economic activities. In comparing to the houses, single consumers, as infrequent buyers of factors, incur comparatively high catching costs. Firms are able to offer cost advantages over markets by capturing economic systems of graduated table in insistent catching. Firms in an Islamic society by and large are no different from their Western opposite numbers.

A house can be viewed as a link of contracts ; that is, its organisation can be mostly described by the set of contracts it enters into. Contractual dealingss are the kernel of houses, non merely with employees but besides with providers, clients, creditors and other parties. The houses are likely to minimise the costs associated with contracts, such as costs of dialogue, monitoring, possible renegotiation, and expected costs of bankruptcy or other failures. Their accounting and coverage policies are likely to be chosen with a position to minimising catching costs, so as to achieve efficient corporate administration. This pick makes of import differences in pull offing contracts and cut downing political costs.

In add-on, directors unwrap unfavourable information due to the fright of legal liability and repute considerations. Directors expand revelation because they perceive their houses to be undervalued by investors, and position undervaluation. The addition in revelation aid in both righting the undervaluation and cut downing costs of fiscal intermediation for the house ‘s portions. Therefore, directors are likely to unwrap information about which they are confident and withhold that they consider unsure.

Firms in an Islamic society are no different. They are expected to run within the given legal and political environments. As contracts are frequently written in accounting Numberss, one of the jobs the houses need to turn to is whether the implicit in principle for delegating values to assets is consistent with the Islamic ethical place. Historic cost informations is likely to be the footing for all accounting computations. The indispensable character of the historical cost accounting is that it is steadfast particular. It is a extremely dependable beginning of information about the house ‘s assets, private debts, the operating public presentation of the house and its hard currency direction. It sits good with the Islamic construct of stewardship ( Zartman 2001 ) . The stewardship aim of historical cost accounting high spots the contractual relationship between a house and those who provide resources to it. The Prophet Mohammed ( Peace be Upon Him ) himself was known to be called The Ameen. A system that allows the director to dispatch this fiducial duty may include some facets of historical cost accounting ( Zartman 2001 ) .

Furthermore, compared to current value methods that require doing anticipations about the hereafter, the historical cost method is less dearly-won and rather simple to understand and utilize. Of class, there are failings in the historical cost system, such as the allotment job and conservativism. However, the failings of the system are improbable to render it wholly irrelevant ( Zartman 2001 ) .

Corporation studies should rest upon the premise that a fiducial direction is describing to absentee investors who have no independent agencies of larning how their representatives are dispatching their stewardship. From an Islamic position, the measuring of assets for finding the sum of zakat to be given is an of import issue. To cipher the sum of zakat, assets need to be measured in modern-day footings, non in historical cost. For the intent of zakat, houses need to be encouraged to re-value their major assets on occasion. Therefore, an Islamic accounting system is likely to utilize both historical cost and market merchandising monetary values. The double system of plus rating is likely to enable houses to suit contracts and to dispatch their societal duties.

The statement of the demand for greater consciousness of the societal impact of house activities in Islam seems to prefer a value added statement, in add-on to the balance sheet and net income and loss statement. A value-added statement involves a rewording of the informations contained in the net income and loss statement.

Value added is the wealth the coverage entity has been able to make by its ain and its employees ‘ attempts. This statement should demo how value added has been used to pay those lending to its creative activity. It usefully elaborates on the net income and loss history and, in clip, may come to be regarded as a preferred manner of depicting public presentation ( Chalmers 2007 ) .

Harmonizing to Chalmers ( 2007 ) value-added statement is likely to ease concentrating on a house ‘s public presentation from the stakeholders ‘ point of position. For illustration, the statement can take to computation of new ratios such as rewards and wages to value added and revenue enhancement to value added. It is likely to put a greater accent upon the co-operative nature of economic activity and less on its competitory facets. This is consistent with the spiritual rule of just and considerate trading contained in the jurisprudence.

The argument over corporate societal duty and answerability has long passed the phase when it was argued that the lone societal duty of concern was to increase its net income within the ‘rules of the game ‘ ( Chalmers 2007 ) . The advocators of societal duty claim that net income should non be the exclusive standards for judging corporate public presentation.

Because corporate behaviour is so critical to the realisation of societal ends such as equal chance, worker safety and wellness, and environmental protection, a societal dimension is added to corporate public presentation. To see the modern corporation in a rigorous economic sense is to disregard world, and to propose that its duties include merely economic duties is myopic.

Social coverage is the procedure of identifying, entering and pass oning information about an entity ‘s public presentation in the societal domain ( Chalmers 2007 ) . It includes describing on the entity ‘s part to employee wellbeing, merchandise quality and safety, community-related activities, public wellness and safety, environment protection, energy preservation, affirmatory action and other related societal facets.

This impression is extremely relevant to concern in an Islamic society. Islam preaches moderateness. It teaches doing a sensible net income. In the western universe, it is called a normal net income. Islam teaches to handle the employees good, to sell merchandises that are clean and pure, to weigh right, to function the community, and to protect the environment.

5. Accounting and coverage policies for houses in Islamic societies

Under the Islamic jurisprudence, all concern patterns that involve the usage of involvement are disallowed. They are being taken as development of some group of people by another group. Similarly, patterns that use anticipations of hereafter are besides disallowed as it is being believed hereafter belong to God. It is expected that parties to concern minutess would pull up contracts that conform to the jurisprudence McGee ( 2004 ) . Accounting in a society exists to reflect the concern patterns of that society ; it has small use otherwise. Therefore, it follows that accounting and coverage patterns of houses in Islamic societies are likely to reflect the Islamic concern contracts and concern patterns.

Monetary value ( 1999 ) says that In an Islamic society, there is likely to be more accent on accounting for partnerships and joint ventures. The usage of interest-bearing bonds and penchant portions would be prohibited. So would the usage of involvement in renting minutess, notes receivable and notes collectible. Because the hereafter is in the custodies of God Almighty, anticipations and the usage of net present value is likely to be disallowed. So would fudge against currency fluctuations.

The usage of historical cost accounting is likely to go on. There are several grounds for this averment. For a start, historical cost theoretical account highlights the fiducial duty of the directors and their stewardship map. Apart from this, the theoretical account objectively reflects plus values at the clip of acquisition. The theoretical account is most appropriate because contracts are written in historical cost Numberss. Above all, historical cost is an efficient engineering. It has withstood the trial of the clip and its usage has survived over centuries. If there were a more efficient rating method than historical cost it would hold displaced the historical cost system long ago.

The usage of selling monetary values is likely to supplement the historical cost system in an Islamic society. There are two grounds for this possibility. First, the market selling monetary values do non affect foretelling the hereafter. The usage of net realizable values can be expected when a concern is being bought, sold, or liquidated. The method is besides likely to be used when a major plus is being replaced or the current market monetary value of the plus becomes well different from its historical cost ( McGee 2004 ) .

Apart from the accent on the net income and loss statement, balance sheet, and hard currency flow statement, a considerable sum of farther information would be provided. This would include a value-added statement and revelation about societal public presentation activities of the house. The above are but a few illustrations of accounting and coverage patterns that are likely to be relevant to houses in Islamic societies. An in-depth survey demands to be conducted to develop an stock list of accounting criterions that are consistent with the jurisprudence. Finally, a major standard for bring forthing accounting information, of class, must be that the cost does non transcend the expected benefit.

6. Decision.

In Islam, the usage of involvement is prohibited ; the hereafter is considered to be in the custodies of God Almighty ; and the pecuniary and physical resources of the house are in trust of directors. What accounting and coverage policies are likely to be in usage in an Islamic society? Clearly, contracts and fiscal instruments that involve the usage of involvement and anticipation of hereafter are likely to be avoided illustrations of these are dismissing factors which involves foretelling future value of money.

Firm directors in Islamic societies are likely to follow policies that are consistent with the demands of the jurisprudence. Directors are besides likely to utilize accounting and coverage policies which maximize the value of the house “ within the regulations of the jurisprudence.

I argue that the studies of houses in Islamic societies are likely to incorporate a balance sheet, a net income and loss statement, a hard currency flow statement and a value added statement. Items affecting the usage of involvement will be excluded and those that are specific to Islamic concern included. Accounting ordinance in an Islamic society demands to be reasonably general and flexible. Detailed and complex ordinance is likely to enforce costs on the houses and finally on the society that it requires to function. A combination of both normative and descriptive attacks to developing Islamic accounting and coverage criterions is likely to bear fruit.


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