Principles of Islamic banking and finance/PIBF202/Financial reporting/Overview

There are many similarities between Islamic and conventional accounting, as both are about providing useful economic information to permit users to make rational decisions by facilitating comparisons and thereby minimising the cost of assessing alternatives investments. However, the nature of transactions in Islamic organisations which deal within a Shari’ah framework is different as Islamic organisations have a duty to contribute to socioeconomic justice and stability.

While Conventional Accounting is based upon modern commercial law, Islamic accounting is based upon ethical law originating in the Qur’an and Sunnah which ultimate purpose is to ensure that Islamic organisations abide by the principles of the Shari’ah in their dealings. Information provided by conventional accounting focus on individuals who control resources while Islamic accounting information concentrates on the community who participate in exploiting resources. They aim at promoting efficiency, leadership and commitment to justice. The differences lies also in the type of information needed in both types of accounting, and how is it measured and valued, recorded and communicated. Conventional accounting is based on economic events and transactions, while Islamic accounting is based socioeconomic and religious events and transactions. In fact, conventional accounting mainly uses historic cost to measure and values assets and liabilities; which restricts this model due to assumptions of the monetary unit and its inflation. From an Islamic point of view, both financial and non-financial measures regarding the specific events and transactions are measured and reported. To calculate the amount of Zakat, assets need to be measured in contemporary terms, not in historical cost. The dual system of asset valuation using both historical cost and market selling prices is likely to enable Islamic organizations to accommodate contracts and to discharge their social obligations.