Islamic Accounting in Business Practices

Fundamental Islamic values to business activities.

Islamic Accounting hopes that Islamic organizations abide by the principles of the Shari’ah or Islamic Law in its business activities. There is a prohibition of interest-based income or expense in the business activities according to the Islamic accounting. In Islamic accounting, the profit determination is more important. In the reporting of financial statement according to Islamic accounting, the reporting must be holistic. Its mean that both financial and non-financial business activities must be measured and reported in the statement to avoid any ambiguity. Ash-Shura principle known as consultation and it was practiced and promoted by Prophet Muhammad personally. It’s about individual consult with other before making any decision. It is necessary to select employees with the suitable knowledge and experience in the field of employment. According to him, it is advisable to assign the employees to his companions who were known to be competent and capable of discharging their obligations. In Islamic accounting, the date of occurrence of the transaction is very important and it is based on the principle of Al-Haol known as periodicity. According to this principle an income was not subject to zakat unless it had been in the possession of the owner for 12 calendar months. The other important value is self-control. It is belief that Allah is watching all acts and thoughts of mankind. That is why the transaction of the trade must be properly record and report. Self-control will enhance the accountability of the individual.

The need for Islamic Accounting

Islamic accounting will enable stakeholders of an entity to ensure that the entity is continuously operating within the bounds of the Islamic Shari’ah. Islamic accounting also is needed because the needs to maintain proper accounting records and prepare adequate reports as required by the Quran. It also will establish a mechanism to ensure adequate accountability for those responsible for the collection of the revenues and also expenses.
Islamic accounting is motivated to maintain adequate records to facilitate the recording, measurement, and reporting of their business transactions. It is aimed to the measurement of profits and capital growth for the payment of Zakat to Baitul-Mal. Islamic accounting also introduce the principle of decentralized power and it’s based on the principle of Ash-Shura. It’s requires individuals in different positions to consult with the appropriate knowledgeable persons in the relevant field before making any decision on any issue.
The development of Islamic accounting records and reports help in decision making. According to Ash-Shafi’ie someone who learns accounting can make a good decision and the trader or any other individual cannot express an appropriate opinion or make good decision without the assistance of the information recorded in the books (accounting). Islamic accounting treated as a tool which will enable the Muslims to evaluate their own responsibilities and accountabilities to God in term of human and environmental transactions.