Basics of Islamic Accounting

Doing Business in Indonesia: Basics of Islamic Accounting

Accounting can be defined as the process of recording financial transactions pertaining to a business. It includes the summarizing, analyzing, and reporting of the company to analyze its performance. This is the conventional definition. But how about if we put the prefix “Islamic?” What would be the definition now?

Islamic Accounting is an accounting that integrates the Shariah Framework, which is based on Qur’an. There are two General Principles in the Islamic Accounting System – Justice and Benevolence. We will discuss these concepts later.

The scope of Islamic Accounting is broad. In these “Basics” of Islamic Accounting, we’re only going to focus on the Islamic Accounting Principles, Basic Islamic Accounting Definitions, and Islamic Financial Accounting Standards.

 

Basics of Islamic Accounting: Islamic Accounting Principles

Principles are the fundamental truth or proposition that serve as the foundation of any belief or behaviour that we use later for reasoning. Just like any other discipline, the foundation of its philosophy lies in Justice and Benevolence.

The Islamic Society believes in the value of Justice and Benevolence reflected on its system of Islamic Accounting. The former happens when the banking system adheres to the rules and regulations of Islam. The money that’s coming in and out of the bank shouldn’t be from any illegal activities. To show Justice, the bank can even exploit the bank accounts of the people who take part in such irregularities.

The latter, however, happens when the interest of the public is being served. The philosophy of the bank shouldn’t only be earning money but rather, it should help people especially in times of emergency like lending them money during calamities or simply helping them to alleviate poverty through loan packages.

 

Basic Islamic Accounting Definitions

Assets

These are the things that have economic benefits and at the same time increase the cash flow.

Liabilities

These are enforceable obligations under Shariah Law. The obligations happen when there are transactions of receiving cash, goods, and services which have to be paid eventually and where there’s an involvement of any Islamic Bank.

Equity of Unrestricted Account Holders

These are the funds that the Islamic Bank receive from their Account Holders which they can use without any restriction for financing investments as stipulated in the Shariah Law.

Ownership Equity

This is the leftover amount in the balance sheet after the deduction of the bank’s liabilities from the bank’s assets. It leads to the equity of unrestricted investments in Islamic Accounting.

Cash and Cash Equivalent

These are the local and foreign currency and demand deposits at other institutions within the framework of an Islamic Bank.

Restricted Investments

These are the funds that the Islamic Bank receives from the holders of restricted investment accounts. The bank doesn’t own the fund but only acts as a manager where the clients have to pay for the services of the bank for rendering such.

Zakath Funds

These are obligations of the Islamic People on their wealth and income as prescribed in the Qur’an. They have two roles if they choose the Islamic Bank. First, they need to compute for the Zakat Liability of their clients. Then, second and final, they need to compute the fees for processing the Zakat. This will serve as the income for the Islamic Bank.

Al-Qard Al Hasana Fund

These are revolving funds in which people in need can apply for an interest-free loan like when they have experienced a calamity.

 

Basics of Islamic Accounting: Islamic Financial Accounting Standards

Standards are the measures, norms, or models that we use when comparing things. Just like any other disciplines to ensure quality, Islamic Financial Accounting also has its own set of standards. These are the standards:

1. The industry report, standards, reference books, and all other related data are managed in an information library.
2. All the reports and IKFC researches should be delivered to the stakeholders of the company.
3. The people who should be conducting finance surveys should be Islamic Finance Leaders.
4. Whenever the policymakers and experts discuss some ideas, it should be shared with all the members of their team.
5. Special magazines are published to share leadership ideas.

 

Do You Need a Good Company to Provide you with an Excellent Accounting Service in Indonesia?

If you are looking for accounting experts in Indonesia, we at 3E Accounting would like to help. We offer our clients quality accounting services. We can’t wait to serve you. You can Contact Us to reach us today.