Differences between Conventional and Islamic Accounting Essay Example

interest-based elements.

Because of the interest-based requirement, conventional accounting adopts the 'historical cost and conservatism concept' in order to ensure whether the capital and interest are repaid. This is one of the elements embedded in conventional accounting which is already violating the requirements of Shari. As an alternative accounting system, Islamic accounting is gaining more recognition, especially by Islamic countries. It is necessary to have Islamic accounting to be in place rather than conventional organizations. The Accounting and Auditing Organization For Islamic Financial

Institutions (PAYOFF) was formed for this reason. To this date, PAYOFF has produced a set of accounting standards that could represent a benchmark framework that draws rationales from the Shari. Islamic accounting can be initially defined as the "accounting process" which provides appropriate information (not necessarily limited to financial data) to stakeholders of an entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shari and delivering its socioeconomic objectives.

Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to God (in respect of inter-human / environmental transactions). The meaning of Islamic accounting would be clearer if we compare this with the definition of 'conventional accounting. Conventional accounting as we know it is defined to be the identification, recording, classification, interpreting and communication of economic events to permit users to make informed decisions (AAA, 1966). From this, it can be seen that both accounting systems set out the similar objective of reporting.

However, the differences lie in the following;  The objectives of providing the information; The type of information is identified;  How the information is it measured, valued,

recorded, and communicated; and To whom will the information be communicated (the users). At present, PAYOFF has no legal backing. Only few countries such as Bahrain and Sudan have made PAYOFF standards mandatory to their Islamic Financial Institutions (IF's). In the absence of legal provisions, compliance with its standards is on a voluntary basis to the extent that IF's do not comply.

In so doing, how IF's' financial statements are to be made comparable? And when accountants of the firms encountered faculties in regards to complex transactions, they will eventually resort to conventional accounting treatment because of lack of knowledge in Shari. Therefore, this project paper intends to highlight and address the important distinctions between both conventional and Islamic accounting which is presently thought of many people as synonymous. There is a danger for such kind of perception because the basic building blocks for respective accounting are worlds apart.

Further, such blind acceptance and adoption of conventional accounting in Islamic organizations would lead to socio-economic behavior inconsistent with the specific Islamic objectives, the attainment of which these institutions were set up for in the first place. Religion, economy and accounting When conventional and Islamic accounting are compared, first and foremost, we European and communist blocks adopted a different set of accounting practices. In communist countries, there is lack of profit motive.

Thus, profit and loss account and balance sheet don't make sense in that economic system. This is why the accounting profession never developed in Communist countries. Only after financial market liberation's I. E. Conversion to capitalism market, that these states trying to catch up tit the West. We can conclude here, that modern accounting

is in fact, capitalist accounting (Shall Hammed, 2000). It is an offspring to a capitalist economy. The adjective 'capitalist' is, however, is not attached to the word 'accounting because it would then appear not neutral.

Furthermore, it has been proposed that capitalism owes its beginnings to the Protestant ethic which emphasis frugality and industry. Protestantism led by Calvin legalized the interest as opposed to Catholicism. The subsequent growth of trade aided by the formation of limited liability corporations ND stock markets enabled the manipulation and concentration of vast amounts of capital. These factors gave rise to the development of modern accounting and financial reporting practices based on 'stewardship theory and later, on decision usefulness.

Plainly put and in terms, conventional accounting is best described as formal rationalism of capitalist economy orientation so as to legitimate its action. On the other hand, conventional accounting is claimed by some writers to be a product of culture. It is a set of beliefs and techniques that has the ability to link actions and aloes so as to legitimate those actions. On contrary, Islamic accounting is a value-oriented activity, the development of which encompasses moral, spiritual, material, and social aspects.

It is governed by divine injunctions and does not separate the secular and religious and holistic in its reporting. Its principles do not serve the interest of any particular group, but to the society as a whole which can make corporations accountable for their actions and ensure they comply with Shari principles. Nevertheless, Islam is not against the market system per SE. Islam does not deny the market forces and market economy. Even the profit motive is acceptable to

a reasonable extent. Private ownership is not totally negated.

Yet, the basic difference between capitalist and Islamic economies is that in secular capitalism, the profit motive or private ownership are given unbridled power to make economic decisions. Their liberty is not controlled by any divine injunctions. If there are some restrictions, they are imposed by human beings and subject to change through democratic legislation. When both accounting manifested according to the origins of its respective economic systems, the accounting treatments are totally different to each other.