UNDERSTANDING AND AWARENESS OF ISLAMIC ACCOUNTING

In early history of accounting, the first name to describe the system of debits and credits in journals and ledger which in fact still the basics of today’s accounting is called Luca Pacioli, year 1494. Accounting is defined as a valuable knowledge to be performed and it is considered to be the main index for all countries’ economy.
Accounting is also an essential part in processing information of business and economy activity into financial statements. In other words, accounting is the universal language of business and economics as well as finance. However, unfortunately, there is still fraudulent and dishonest practices in business and economic activities. There is no certain activity that could be possible done without relying on accounting, because accounting deals with information that consists of financial status and profitability of economic enterprises.
Islamic accounting has existed since the 1500s and has its own principle that not only can decrease the degree of unexpected activities pertaining to accounting process but also increase the welfare of both internal and external parties of the business. That’s because Islamic accounting has an aspect that has more meaning and value which is a similar aspect of conventional accounting too. It comprises of all values required to the most preferable accounting process. Those which are Shariah-compliant are pursued and those that are not are discarded.

Certain Islamic ethical principles have a direct impact on accounting policy and principles.These principles are derived from the Holy Qur’an and the Sunnah, that stresses on the need for justice, truth, and fairness, and are considered to be a society’s priority and responsibility. This also contains specific standards for accounting practices. In Islamic financing principles, it must follow specific elements which gives it distinctive religious identity.

These elements are:

Riba (interest): The payment and taking of interest as occurs in a conventional banking system is explicitly prohibited by the Holy Qur’an.
Zakat: The process of repetitive distributions of income and wealth is inherently in Islam to guarantee a fair standard of living for every people especially the poor. Zakat is different from a tax, A tax is an obligation of citizens toward the society, whereas zakat is an obligation of a Muslim not only to society but also to Allah.
Haram: Islamic banks cannot finance activities or items forbidden in Islam, Islamic banks give priority to essential production which caters to the needs of the majority of the Muslim community.
Takaful (joint-guarantee): The only type of insurance that would appear to be lawful according to the Shari’ah insurance.

Muslims ought to conduct their business activities according to the requirements of their religion which are moderation, justice, kindness, honesty, spending to meet social obligations. Unfairness and greed should be avoided at all times. Applying Islamic accounting principles leaves a beneficial impact directly and indirectly on the internal and external parties of the business.

Less possibilities of unexpected activities by the accountant such as fraud in business and society. The creditor will feel more secure in investing their funds in the business. Financial statement and reporting will facilitate better and more accurate decision making by the users. One of the Islamic accounting purpose is to be concerned about the employees and their families when performing their jobs. It can be useful in reducing poverty and increasing the welfare of the society within the company. This increases the purchasing power of the underprivileged which indirectly contributes to the economic growth.The company also benefits from increased profits, customers’ loyalty, trust, positive brand attitude, combating negative publicity, and having a rightful place in the business world.

Islamic accounting obligates businesses to follow the Sharia strictly, it is considered a religious responsibility. Economic responsibility requires financial statements to be viable, profitable and efficient whereas ethical accounting is obliged to respect societal and religious values.