Islamic Accounting vs. Modern Accounting

ISLAMIC ACCOUNTING VS. MODERN ACCOUNTING

By: Prof. Dr. Mohd. Ma’sum Billah masum2001@yahoo.com applied-islamicfinance@yahoo.com

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Introduction

It is believed that accounting reflects a culture as accounting is a record of business activities. It is natural that accounting should include in itself traces of a socio-cultural circumstance in which the business activities are carried out. Therefore, one can read cultural features and social system of a society to which an accountant belongs, once he or she looking through an accounting book. Moreover bookkeeping conventions themselves vary from culture to culture. During Abbasid period, Islamic society developed its special way of accounting.

Definitely the medieval Islam way of accounting is not being practiced any longer in the medieval Islamic world, due to the western method of accounting has been dominant through out the world. But we can still observe in account books of Muslim accountants the excellent features indigenous to Islamic culture. The Islamic accounting idea is not as familiar as the modern accounting, so it makes people keep on asking if there is any type of bookkeeping in Islamic world. However, this paper does intend to compare the different features between the unique accounting procedures in the Islamic world and the modern western world.

Although, there are many similarities in the skills of accounting practices which are practiced in the business field today, but, the different between the two methods of bookkeeping is somehow exist. After we went through some reading, we arrive to a conclusion that both methods are different concerning the view and the application with the line of religion.

In this paper, I would like to discuss the view of modern accounting applied by western accounting. This system is a privately controlled system and since many alternatives are accepted as sound accounting producers, it is used for income control by the management. The accounting figures as merely an illusion in turn affect the society and the enterprise itself through the stock exchange market. Against the neo-classical economic accounting which has been developed in America, critical accounting started in England.

That is the accounting which has tried to develop the n- dimensional accounting to explain the n-dimensional reality and the accounting which values societal role of it. The co-variance between accounting and society is present strongly. It is meaningless to discuss the difference on the surface alone when we discuss accounting in the Middle East. In this section, I will explain the emerge of Islamic accounting and its standpoint. Influenced by the Islamic fundamental movement, the scholars of accounting begin to explain accounting from the Islamic point of view.

Though the conventional Western accounting has been dominant even in the Middle East, they think it should be reformed along with their economic requirement. At the same time, it should be evaluated by the Islamic law.

The second section in a view of Islamic accounting, it will discuss the Arabic word Muhasabah which means accounting and the Arabic word Muhtasib means market inspector. After that I am going to discuss accounting for Zakat. Zakat is one of the pillars of Islamic life. Here I would like to concentrate on Zakat of the business enterprise. First chapter I will explain the general characteristics of Zakat and the next section is the treatment of Zakat fund account in the Islamic bank. A View of Modern Accounting

So long as modernization can not be separated from westernization, it is natural for Islam to be prudent about taking on the modernization policy. That is why some people might say that Islamic countries got behind modernization because they denied Westernization, and because if modernization means Westernization, they had no choice to deny modernization itself. Islam completely separated modernization from Westernization. Some of the elite in the Islamic countries who attempted to introduce Western technologies, the legal and economical systems without doubt, had to isolated now, due to the intelligence of the modern Middle East gave up capitalism and socialism, and they begin to seek a third way.

However, their destination has been unclear so far.

Let us define what is accounting? According to western definition, it is something that people in their personal lives just as much as it affects very large businesses. We all use accounting ideas when we plan what we are going to do with our money. We have to plan how much of it we will spend and how much we will save. We may write down a plan, known as a budget, or we may simply keep it in our minds. However, when people normally talk about accounting it means the type used by businesses and other organizations.

They cannot keep all the details in their minds so they have to keep records of it. They will not only record cash received and paid out only, but also they will record goods bought and sold, items bought to use rather than to sell, and so on. This part of accounting is usually called the recording of data.

Accounting is a reflection of culture. Many accountants have mentioned it and it is a well known common knowledge. It is so true to guess that before the western (double entry) bookkeeping or accounting conventions spread almost all over the world; through colonization through out the world previously. Plus, the accounting procedures were actually different from one place to another, according to regions.

In the Islamic world, it is known that accounting in the public sector, which was developed under the control of the financial division of the government named bay’i al-mal, formed a very sophisticated bookkeeping system and accounting information networks[1]. However, if accounting as to what it was, is reformed historically and is discussed how it had the improved system from the modern point of view, then it cannot be evaluated beyond the framework of today’s accounting. Accounting cannot and should not be evaluated except in the context of the society where it is practiced.

For example, we can raise the question concerning what it is ‘to account’. We might consider that to account is useful, however, it means conversely not only that things which can not have any useful method to think about the things we cannot account. Therefore, it should be ignored or be reformed in the way by which we can account practically.

In contrast, accounting practiced today looks universal as one might be saying that accounting was simply a function of middle management, such as production scheduling or credit control, dealing with self-evident facts which could be carelessly and even fraudulently stated, but whose could rapidly agree once in possession.

A View of Islamic Accounting

The emergence of Islamic accounting

From the 15th century, when Arabs had gone out of the European view, till the very recent days, Islam had not come to the center of world history. The Europeans, in turn, have dominated world history, particularly after the industrial revolution, and they intervened in the Middle East, Asia, and Africa under the name of imperialism. At that time, for the middle Eastern elite who were proud of the cultural tradition which had been more excellent than that of Europe, political defeat to the western countries was crucial so as to injure their identify deeply.

Then because of this overwhelmingly inferior feeling to the West, they chose Westernization. As a result, the sector concerned with management like national finance, commerce, or banking in the occupied area, was institutionally destroyed and reconstructed to meet the needs of the occupying countries. Their institution was capitalism, but they were subject to the so called big countries. The Middle East formally could be independent after the World War, but politically and economically they have been still dependent on the Western system.

Looking at the way the Western people deal with the Middle East, they have taken it for granted the dependence of Middle East on the West and they thought that they could control the Middle East because they can not do anything by themselves. This view of International relationship that so called superpowers controlled and managed the world has dominated. In this sense, the covering of the surroundings by the center has been successful.

What accounting means in the Islamic society

Islamic accounting is considered to be a part of the society and it can not be separate from Islamic law. In this section, I would like to explain how the commercial actions are recognized basically in Islam, because accounting theory in Islamic thoughts is based on this view. Next, I would like to explain the implicit meaning of the Arabic word muhasabah which means accounting. I will discuss the meaning of muhasabah and what it reminds Muslims of, after explaining its root and its derivations.

When Muslims think of Muhasabah, it means more than just a numerical calculation. Muhtasib means the Muslim world before the occupation of the West. The word Muhtasib is also derived from the root h.s.b. It is usually translated as a market inspector, but his duties were connected not just with the economic affairs.

Commerce in Quran: “Islam is perhaps the only religion that gives a high and positive value to lawful economic activity. The gain from economic activity is considered a bounty from Allah.[2] M. Watt says Islam is the religion of the merchants, thought it is neither the religion of the desert nor the farmers. During the time of Prophet S.A.W., he himself was a leader of the caravan of Khadijah, who later became of his wives. Moreover, Mecca was the centre of trade and banking, where Islam became know first. In the Holy Quran, there are many verses using the terms of commerce.

“Lo! Those who read the Scripture of Allah, and establish worship, and establish worship, and spend of that which We have bestowed on them secretly and openly, they look forward to imperishable gain.” [3]

Jihad, which is sometimes translated as holy war, is originally understood as any efforts for the preservation and propaganda of Islam and good trade is explained as a part of them.[4] In the Mecca period, the Prophet warns about the unlawful transactions.[5] In the Medina period, he gives preference on faith in God and he prohibited trade on Fridays, which is the day of prayer.[6] He encourages commerce, but he strictly prohibits the usury. [7]

What is the most interesting are the phrases which tell us of the liquidation of the acts of a person on the Judgments Day-accounting of acts. To believe in the Judgment Day is one of the six pillars of Iman.

“There is none in the heavens and the earth but cometh unto the beneficent as a slave. Verily He knoweth them and numbereth them with (right) numbering. And each one of them will come unto Him on the Day of Resurrection, alone. (19:93-95)

Two angels follow every Muslim to record full accounts of his words and acts.

Lo! There are above you guardians, Generous and recording, Who know (all) that ye do. (82:10-12)

His acts are audited and recorded by these angels.

When the two Receivers receive (him), seated on the right hand and on the left, He uttereth no word but there is with him an observer ready. (82:10-12)

Here in this book his acts are recorded in full account and the book is placed, and thou seest the guilty fearful of that which and they say: What kind of a book is this that leaveth not a small thing nor a great thing but hath counted it! And they find all that they did confronting them, and thy Lord wrongth no one. (18:50)

Then his acts will liquidate on the Judgment Day. In Islam, the pursuit of the happiness of the human being is a supreme must. The supreme situation, that is, the supreme bliss, exit in the hereafter, and this world is the trial ground to decide one’s destiny in hereafter. In this world one should make his/her good and bad deeds are weighed in the balance (mizan), and measured through the unique view of the values of Islam.

“And We set a just balance for the day of resurrection so that no soul is wronged in aught. Though it is of the weight of a grain of mustard seed, We bring it. And We suffice for reckoners.”[8] “The weighing on that day is the true (weighing). As for those whose scale is heavy, they are the successful. And as for those whose scale is light: those are they who lose their souls because they disbelieved Our revelations.”[9]

As a conclusion, the believer who goes along the road of faith will be handed the book recording his acts in the right hand, and the unbeliever who indulges in the bad things will be handed it in the left hand.

Then, as for him is given his record in his right hand, he will say: Take, read my book! Surely I knew that I should have to meet my reckoning (hisabiyah). Then he will be in blissful state in high Garden Whereof the clusters are in easy reach. (And it will be said unto those therein): Eat and drink at ease for that which ye sent on before you in past days. But as for him who is given his record in his left hand, he will say: Oh, would that I had not been given my book. And knew not what my reckoning (hisabiyah)! [10]

Definitely, a man who is devoted and faithful, the door to the heaven will be opened, but to the ungodly man the door to the hell will be opened.

“Then those whose scales are heavy, they are the successful. And those whose scales are light are those who lose their souls, in hell abiding.”[11]

Moreover, the knowledge of accounting has been revealed by Allah through His Prophet that, each and every single act of human being will be accounting and liquidated on the judgment day.

In the holy Qura’n, there are many theories on the nature of accounting, its aim, ideology and principles, and the theories on the accounting indices, and data collection, its circulation and its feedback system for the purpose of indicating the financial situation at the end of an accounting period. Syariah does not treat assets evaluation or the result of the profit and loss measurement of an economic unit in a period. Shariah gives us a special accounting that accused the human being and records all of the acts (‘alam) of the life or the creatures on the earth, and it has interests in the situations and acts during a certain period, i.e., the accounting period or the period God defines.[12]

Islamic accounting cites the Sari’ah and Shariah include the calculation of the human acts. “God illustrates supremely, and there is no god besides Allah.[13]

Accounting of Zakat

In the previous slide, I mentioned that Islamic accounting (accounting from the Islamic point of view) is coming into Muslim accountant’s consideration under the Islamic fundamental movement. It does not merely describe it as a part of the Islamic society. It is societal in spite of the fact that the subject of accounting is a business enterprise. In other words, Islamic accounting exists for the society. In this sense, it contrasts with the Western conventional accounting which exists for the business entity.

This is one of the practices of Islamic accounting. I would like to pick out the problem of Zakat accounting. The reasons are: i) it has not been made clear as to what is Islamic accounting because it just started, ii) Zakat accounting implies the Islamic view of view of value in it from beginning, because Zakat is an institution which started at the same time when Islam started. The important concepts in accounting are included in it and it is suitable to think Islamic accounting since it is applied only to Muslims.

First of all, I will discuss the general characteristics of Zakat. Secondly, I will discuss what is required in the practice of Zakat accounting. The unique principles in Islamic accounting are shown. In this section, I would like to narrow down to the problem of Zakat of the business enterprise, because the common problem existing are the problems of evaluation of assets and measurement of costs and revenue. The concept discussed here is agreeable with aim of Islam. I would like to mention the view of the business enterprise in Islam derived from Zakat calculation and Zakat payment.

Finally, I would like to explain Zakat accounts in the bank (the Islamic bank). Non-interest bank which was established with the object of being in the van of establishing the ideal society of Islam has Zakat accounts which are reserved from the deposit. The religious supervisory board in the bank is working for this fund. Zakat gives the bank an Islamic role.

General characteristics of Zakat.

Zakat has the following characteristics, which prove Zakat is not an ordinal tax. 1) It is one of five pillars of Islam, which are: i) Shahadah, which is to witness their faith as Muslims. ii) Salat, which is to pray five times a day. iii) Zakat, which is to pay alms. iv) Sawm, which is to fast during the month of Ramadhan. v) Hajj, Which is to make a pilgrimage to Mecca whoever can afford it. Zakat is closely linked with other pillars. For example, while Solat is the obligation of the body, Zakat is the obligation of the wealth.

Therefore, Salat and Zakat are inseparable for purification of bodies and wealth. Zakat is tightly connected with other fundamental aspects of Islamic belief.

2) The proceeds of Zakat should be spent in a certain manner specified in the Qura’an.[14] Beneficiaries are as follows: i) the poor (fakir) ii) the needy (miskin) iii) Zakat officials (amil) iv) Those who reconciled to Islam (al-ma’lafahqulubahum) v) The liberation of captives and slaves (riqab) vi) The debtor (gharim) vii) In the cause of God (fi sabilillah) viii) The wayfarers (ibn-al-sabil)

3) Zakat rate is fixed by the definition of traditions (Hadith), though the rate is different according to the type of economic activities. 4) It is levied on Muslim individuals only because it is the religious foundation of Islam. Though joint-stock company has its own juristic personality independent from the shareholders, it may be subject to Zakat. 5) Debt is exempted from Zakat base. That is Zakat is imposed on the net accumulated wealth (net asset). 6) The wealth subject to Zakat should be more than the minimum level (nisab) stipulated in Hadith.

This is the necessary amount of assets the income of which provides the basic needs of the owner and his family. 7) The assets subject to Zakat should be possessed over one full (lunar) year.

The accounting standards of Zakat.

Reflecting on the above characteristics of Zakat, the main topics of accounting standards for Zakat might be as following[15]: 1) The evaluation of the current exchange value or the market value: Most of the scholars of shariah support that the assets which the enterprise has at the time of calculation of Zakat should be evaluated at the current (market) value. I would like to discuss what is implied by this evaluation principle later. 2) One year rule: To measure the value of assets, the lunar calendar should be adopted except for Zakat agriculture.

These assets should be possessed over one full year. 3) Independent rule: This rule is related with the above. Zakat calculated is subject to the wealth of this year end. The credit receivable or the carried over income is not included. 4) Realization rule: The increasing amount is recognized in that year whether the transaction is complete or not. That is the credit should be included in Zakat base. 5) Taxable rule: Nisab should be calculated according to the Hadith which is not collect Zakat from Muslims who do not have wealth.

6) Net total (gross) income but net income: After one full year, expenses, debts, and family use should be deducted from income subject to Zakat. 7) Nationality of assets: Whatever is in the Islamic countries or not, if the owner is a Muslim, then it should be included in his wealth which is subject to Zakat and calculation of Nisab.

The treatment of Zakat fund account in the Islamic bank.

Zakat is disbursed by Muslims as an obligation. In the early period Islamic states collected Zakat through the regular officials and administered it from the national treasury to support the poor among the community, build mosques and defray government expenses. However, after the disintegration of the purely Islamic state, Zakat was again left to Molem’s conscience. According to Ibn Tamiyah, Muslaims do not necessarily pay Zakat to the ruler if he is not just or if he does not spend Zakat revenue on its purpose beneficiaries.

Muslims have a right to hand it directly to them.[16] Speaking of today’s situation, there are few states completely Islamilized. The states which are not Islamilized economically have no authority or obligation to collect Zakat. However, as I mentioned, Zakat is paid by Muslims. Thought it is not clear where Muslims pay Zakat, the Islamic Bank could be one of the institutions where they pay Zakat. 100 questions and 100 answers on Islamic Banks say:

A Zakat fund must therefore be established in each bank. In the countries where the ruler takes charge of collecting alms (Zakat), the Islamic Bank can then play the role of a technical organization that assists the government. In case the ruler of a country has nothing to do with the ordiance of Zakat, it is up to the Islamic Bank to call upon Muslims to do this ordiance. It collects the Zakat and administers its funds in the legal ways.[17] As generally known, the Islamic Bank was born as an organization to establish the Islamic economy in the Islamic fundamental movement.

It naturally coincides with the idea of shariah and their fundamental principles are: 1) The complete elimination of interest in any form from the banking system. 2) The use of several forms of profit-sharing (PLS) plans as the backbone of Islamic banking practices. The normal operations of banks are opening current and saving accounts and purchasing and selling gold bullion and foreign currency and drafts in such changes and so on. Of course, this operation should be free from interest because Islam strictly prohibits it.

As-sadr thinks that because the Islamic Banks are operated in the society where the other banks accept the interest, they should oppose each other.

In addition to the normal operations, according to Abdel-Magid, to collect contributions for Zakat fund and to dispense the fun according to the Islamic Shariah is one of the objectives of Islamic banks. As he says, “the most interesting accounting aspects of Islamic banking is that the Islamic bank is a legal entity comprising the accounting entities of the Zakat fund, normal banking operations, investment deposits, and general investments. [18]

The Islamic bank operates the Zakat funds separately from the other deposits and to operate this funds it has a special board, namely, the religious supervisory board.

The Religious Supervisory Board:

The religious supervisory board is the institute which ensures that the bank’s dealings and activities are consistent with the Shariah. It is formed by the articles. For example, the Albaraka Islamic Investment Bank defined it in the article 58-60 as the Shariah Legal Advisors. Dar al- Maalal-Islam trust has the religious Supervisory Board too. The members consist of those who are selected from among the Islamic scholars and jurists of comparative law and also are highly knowledgeable and proficient in Shariah related to financial transactions.

They give advice concerning the application of Shariah. They can request a special meeting of the board of directors to explain their view on Shariah. Moreover, they prepare a religious auditing report as a pat of the annual report. This board certifies that the bank’s operations are carried on in accordance with the Shariah. In the bank’s annual report the member’s names are published with the name of financial auditors. Conversely, the financial auditor should report that he has seen the religious auditing report and the bank’s operations have been satisfactory in accordance with the Shariah.

The act of the religious supervisory board might be seen for us is only a religious approval. However, in the Islamic society, to obtain a religious approval means that the economic act concerned is recognized as a just act, that is it belongs to category of the auditable economic act. For example, the interest (riba) is forbidden by the Quran.[19] Moreover, if such an act with interest is done, it means deviant behavior, and then accounting does not have deal with it. In other words, the auditing act by the religious supervisory board could be thought as the subject of accounting.

The satisfaction of the religious matter is also required as one of the accounting information in the Islamic society. It proves that Islamic society never divides the religious things from the economic matter.

Concluding Remarks

Islamic accounting is society oriented. Accounting is not only a tool for translating economic phenomena in monetary terms but also a method of describing how the economic phenomena are working in the Islamic society. It is different fro the distinction between descriptive accounting and normative accounting, because the latter aims to offer a suitable accounting for a certain purpose is different, naturally the norm is different. Because of this nature, Western accounting (particularly in America) has as many normative alternatives as the number of interest groups concerned.

In other words, accounting is separated from the society where it is practiced. Alternatives of accounting procedures are considered as rules to measure profit. The rule which controls these rules is unclear. If I can call such a meta-rule, our accounting has lost the clarity of the first rule. As a result, the business enterprises are acting separately from both the society and individual. Islamic accounting has one aim, that is accounting should obey the teachings of Islam because of the oneness of Islam.

In this sense, all Islamic accounting can be said to be normative. However, it is correct to say that in a society, like the Islamic one, “such attractive distinction as positive or normative and such a fundamental dichotomy as facts or values, which are typical of , and adapted to a kind of knowledge could now in a way methodogical obstacles for accounting studies (on Islamic accounting).” The assets of the company for the Muslim accountants should be measured by the saleable value. As far as the Islamic interpretation of the assets is concerned, its difference from conventional accounting does not matter.

Of course, there might be different opinions to one economic phenomenon. The argument concerning the characteristic of Zakat is one example. It does not matter how the enterprise saves money or the government collects tax, but the problem is determining what is best for understanding Islam. The following sentences are available for Islamic accounting.

….necessity is always driving the Islamic society to amend and revise the codes. What is exercise at that time is not the legislative power but interpretative power.[20]

Islamic accounting may not deny the opinion that accounting adjusts the interest groups. However Islamic accounting deals with economics problems, the political problems as well as the accounting problems. In other words, it functions as a part of the shari’ah and in that sense it would be justified that Islamic accounting plays role to adjust the interest groups in the society. I would like to mention again that Islamic accounting is learnt as an accounting system and at the same time, it is interpreted as management, economics, laws, politics and religion.

The zakat fund in Islamic accounting is audited by the religious supervisory board. This treatment naturally comes into sides of Islamic accounting. In short, religious justice is regarded as a problem of accounting. I do not know the shariah committee as an organized inner auditing institution except as the religious supervisory board in the Islamic bank today, but it could be thought of as one where the individual enterprise consults with Islamic jurists for its problems or it has the religious board as an institution.

Islamic accounting includes issues which we are not accustomed to think of in accounting. The acts of human beings are liquidated on the day of the judgment. Accounting should be considered as one of the derivations of hisa’b, that prompt what is proper and to forbid what is bad (amar bil ma’aruf wa nahi ‘ani mungkar). Zakat accounting shows the process where the properties earned lawfully by the enterprise are justified. It is one of the examples of derivation of hisab which belongs to the ambit of accounting. The derivation belonging to the political matter is al-hisb and its officer, muhtasib.

----------------------- [1] Shauqi Isumail Shahata, Financial Accounting from the Islamic point of view, Cairo: al-zahra al-alam al-arabi, 1987, page 15. [2] A.A. Islahi, Economic Concepts of Ibn Taymiyah, London: Islamic Foundation, 1988, p.151. and also refer to the verse of Qur’an. (3:174) [3] Qur’an: (35:29) [4] Qur’an: (61:10) [5] Qur’an: (55:7-8), (83:1-3), 6:152), (7:85) [6] Qur’an: (62:9-10) [7] Qur’an: (3:130) [8] Qur’an : (21:47) [9] Qur’an : (7:8-9) [10] Qur’an : (69:19-26) [11] Qur’an : (23:102-103) [12] Shahata, 1987, p.13 [13] Shahata, 1987, p.15 [14] Qur’an :(9:60) [15] M.K.

Atiya Accounting of the Company and the Bank for the Islamic organization, 1984, p.210-211. [16] A.A. Islahi, Economic Concepts of Ibn Taymiya, London: Islamic Foundation, 1988, p.216 [17] 100 Questions & 100 Answers on Islamic Banks, edition by International of Islamic Banks, 1987, p.41. [18] Abdul-Magid. P.99. [19] Qur’an : (2:275) [20] Miyoko Kuroda, “Individual and Law: in Sharia” Maydan, No. 17 Niigata: The Institute of Middle Eastern Studies, International University of Japan, 1989, p.3.