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Islamic vs Conventional Accounting Explained

Islamic accounting and conventional accounting both aim to provide information, but they differ in their objectives, types of information, and target users. [1] Islamic accounting aims to ensure compliance with Shariah principles and assessment of organizational objectives, while conventional accounting aims to efficiently allocate resources. [2] Islamic accounting must identify both financial and socio-economic/religious events and transactions using current valuations, whereas conventional accounting focuses on economic transactions using historic costs. [3] Conventional accounting mainly serves financiers, but Islamic accounting serves all stakeholders to make corporations accountable and ensure compliance with Shariah principles and equitable distribution of wealth.

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19 views2 pages

Islamic vs Conventional Accounting Explained

Islamic accounting and conventional accounting both aim to provide information, but they differ in their objectives, types of information, and target users. [1] Islamic accounting aims to ensure compliance with Shariah principles and assessment of organizational objectives, while conventional accounting aims to efficiently allocate resources. [2] Islamic accounting must identify both financial and socio-economic/religious events and transactions using current valuations, whereas conventional accounting focuses on economic transactions using historic costs. [3] Conventional accounting mainly serves financiers, but Islamic accounting serves all stakeholders to make corporations accountable and ensure compliance with Shariah principles and equitable distribution of wealth.

Uploaded by

Dira Alwan
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

TUTORIAL 2 Q7 Both Islamic and Conventional accounting is in the business of providing information.

The differences lie in the following:


1. The objectives of providing the information

Conventional accounting aims to permit informed decisions whose ultimate purpose is to efficiently allocate scarce resources available to their most efficient (and profitable) uses by providing information efficiency in the market. This is achieved by the user making the appropriate, buy, sell or hold decisions on their investments. Islamic Accounting, hopes to enable users to ensure that Islamic organisations (whether business, government or NFP) abide by the principles of the Shariah or Islamic Law in its dealings and enables the assessment of whether the objectives of the organisation are being met. At the very basic level, it can be said that Islamic organisations (whether business or otherwise) differ from their conventional counterparts by having to adhere to certain Shariah principles and rules and also try to achieve certain socio-economic objectives encouraged by Islam.

2. The type of information

Conventional accounting concentrates on identifying economic events and transactions. The concentration of accounting has moved from stewards manorial accounts to accounting for money (accentuated by the monetary measurement concept). Mainly uses historic cost (or lower) to measure and values assets and liabilities. The profession is well aware of the limitations of the stable unit of measure assumption of the monetary unit and to its credit has tried in the past in its inflation accounting initiatives. The idea of using current values was given up due to its complexity and presumed lack of objectivity. Islamic accounting must identify socio-economic and religious events and transactions. On the contrary due to prohibition of interest-based income or expense, profit determination is more important in Islamic accounting than conventional accounting. However, Islamic accounting must be holistic in its reporting Hence, both financial and non-financial measures regarding the economic, social, environmental and religious events and transactions are measured and reported. At least for the purpose of computation of Zakat, current valuation is obligatory. Islamic accounting may require a different statement altogether to deemphasize the focus on profits by the income statement provided by conventional accounting.

3. The users of the information

Conventional accounting, the profession has recognised various stakeholders as users of accounting information. The users which it focuses on are shareholders and creditors (i.e. Financiers those who provide the funds). This is obvious from the fact the FASBs SFAC 1 dismisses a whole range of stakeholders by the term and others. From recent developments in finance and financial markets, accounting seems to be serving an elite group of financiers market players and banks and other financial institutions. It has been accused of helping a group of rich people get richer - a grave charge since the profession always justifies its monopoly on audit services by virtue of the public interest. Islamic accounting serves the whole gamut of stakeholders recognised by the corporate report, not that each group can serve its own interest best, but society as a whole can make corporations accountable for their actions and ensure they comply with Shariah principles and do not harm others while making money ethically and achieve a equitable allocation and distribution of wealth among members of society especially the stakeholders of the concerned corporation.

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