FUNDAMENTALS OF ISLAMIC ACCOUNTING

ACCOUNTING
Accounting can be defined generally as the process of identifying, measuring
and communicating economic information in order to permit informed judgement by the
users of information”. The provision of information about the reporting entity’s financial
performance and financial position that is useful to a wide range of users for assessing
the stewardship of the management and for making economic decisions. The role of
accounting is to serve the accountability of the agent (stewardship of the management)
towards the principal (shareholders and other stakeholders) of the business wealth due
to the separation of ownership and control of the corporation.
Stewardship accounting is associated with the need of those in business to keep records
of their transactions, the manner in which they invested their wealth and the debts owed
to them and by them.
Accounting can be distinguished to two basic functions namely financial
accounting and management accounting. Financial accounting provides information
to people outside the firm. Creditors and shareholders, for example, are not part of the
day-to-day management of the company. Likewise, government agencies such as
Inland Revenue Board, and the general public are external users of a firm’s accounting
information. Management accounting on the other hand, generates confidential
information for internal decision makers, such as top executives, department heads etc.
This internal accounting information will be used to make decision such as to invest, to
buy or sell assets, to cut spending etc. This type of information is crucial for the
management of firm.
The objectives of Accounting
The objectives of Islamic accounting are different from traditional accounting.
Furthermore, traditional accounting doesn't provide whole information concerning in term
of Zakat calculation. Given the statement that main viewpoint in determining Zakat is the
use of the selling price when the Zakat's committee is formed, so Islamic business
organizations need the current value of items and not the historical cost. Some of the
academics have presented the objectives of Islamic accounting as follows:
1. Calculation of Zakat
In this method to purpose of renovation in grow of Zakat in term of profit as an
importance of the welfare of the humanity, no for individual interest. The accounting system
should be considered based upon current values. It has been described that one of the most
important criticisms of the accounting system of current values is the low dependence of
items. Meanwhile, the administration of the Islamic business act based on public interests,

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 justice and equity, it is probable that the existing values-based accounting system present
an appropriate base for Zakat calculation. Since the focus on Zakat can lead to limitation of
financial reporting, thus enchanting into account broader objectives for Islamic accounting
has been necessary.
2. Islamic accountability (stewardship)
In the Islamic method of an accountability is said to be a broader concept, which is
concerned based on Islamic Philosophy. This concept explains the vicegerent status of man
in the world, in which Allah, God Almighty – has given amanah or trust of the earth to man
(AlQur’an 35:39) while other creatures including angels, animals and non-living matter
have no ability to fulfill it. As stated in the Holy Qur’an, Allah indeed has offered the trust
to the Heavens and Earth and the Mountains, but they refused to undertake it being afraid
they're of but man undertook it (Al Qur’an 33:72).
Accountability is referring to the property and resources are held in trust from God and
one furthermost ultimately account to God as to how fine they have been employed.
Accountability is said to be a broader concept than stewardship because it requires an
account of the extent to which the objectives for which the resources were entrusted have
been achieved. The accountant is supposed to take certain actions and refrain from others
in managing the resources given to him, to encounter certain objectives and to account to
his principal by giving information about his actions to him.
3. Useful for decision making
The accounting and auditing organization of Islamic financial institutions in the main
statement of the objectives of Islamic banks and Islamic financial institutions, financial
accounting, has defined the presentation of information in order to assist in the users`
decision makings as the main objective of financial accounting. The transaction of the
activities in accounting must be complied with Shariah guidelines and incoherent in
incorporating a balance between individual character and social character in term of welfare
activities.
The enterprise would be encouraged to participate in releasing humans from the
oppression of economic, socioeconomic activities pertaining to Islam, social, and
intellectual influences and releasing the environment from human exploitation, which is
providing accurate and appropriate information for making decisions, setting appropriate
prices of the products, through equitable distribution of wealth, and retaining the
environment favorable through green reporting.
Meanwhile, the accountability is also recognized by a contract between an owner and
a manager. Further, based on Islamic accountability, subsidiary objectivities can be
determined such as Shariah compliance, valuation and circulation of Zakat, reasonable
distribution of wealth among stakeholders, the creation of a cooperative environment and

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 solidarity and other type of reports that can give in providing information of and
encouraging the enterprise to participate in resolving contemporary the Ummah’s (society)
problems.
According to AAOIFI objectives of accounting are
1.Determine rights and obligations of interested parties to ensure fairness and justice to
all contractual parties.
-Example 1: Profit allocation using weightage to allocate profit as fairly as possible
between the investors and the bank based on the shari’ah requirements of mudharabah
contract.
-Example 2: Profit distribution policy i.e. separate accounting investment method to
fairly allocate expenses only directly associated with the investment, and distribute profit
to mudharabah investors by taking into consideration the shari’ah constraints of
mudharabah contract.
2. Safeguard entity assets and rights of others to ensure proper accounting
recognition(recording) and valuation of the assets to all contractual parties.
-Example 1: In the case of diminishing musharakah, the rights to the assets or project are
reflected by the capital ownership. Proper accounting for musharakah is required to
measure profit sharing ratio of both partners according to Profit Sharing Ratio(PSR), and
loss according to Capital Sharing Ratio(CSR) throughout the contractual periods.
Example 2: in the case of murabahah, the rights of assets are transferred to the real owner,
thus in the banks’ balance sheet, it is recorded as financing asset(i.e. receivable) to reflect
the rights of the bank to receive the payments from customers.

According to AAOIFI, the objectives of financial accounting should determine the type and
nature of information to be included in the financial reports, in order to assist users in
making their decisions. Therefore, the objectives of financial accounting should focus on
the common information needs of the identified users of financial reports. The main
categories of users of the external financial reports for Islamic financial institutions are
as follows:
i. Equity holders
ii. Holders of investment accounts
iii. Other depositors
iv. Current and saving account holders
v. Others who transact business with the Islamic financial institutions, who are not equity
or account holders.
i. Equity holders
ii. Holders of investment accounts
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iii. Other depositors.
iv. Current and saving account holders.
v. Others who transact business with the Islamic financial institutions, who are not equity
or account holders.
vi. Zakat agencies.
vii. Regulatory agencies.
The information needs of the above users may vary from one group to the other.
AAOIFI has also developed the objectives of
Financial accounting and financial reports for Islamic banks and financial
institutions. Among the objectives of financial accounting are:
i. To determine rights and obligations of all interested parties, including those rights
and obligations resulting from incomplete transactions and other events, in
accordance with the principles of Shari’ah and its concept of fairness, charity and
compliance with Islamic business values.
ii. To contribute to the safeguarding of the Islamic bank’s assets, its rights and the rights of
others in an adequate manner.
iii. To contribute to the enhancement of the managerial and productive capabilities of
the Islamic bank and encourage compliance with its established goals and policies
and, above all, compliance with Shari’ah in all transactions and events.
iv. To provide, through financial reports, useful information to users of these reports, to
enable them to make legitimate decisions in their dealings with Islamic banks.
In addition, AAOIFI has also established the objectives of financial reports as follows:
i. Information about the Islamic bank’s compliance with the Shari’ah and its objectives
and to establish such compliance; and information establishing the separation of
prohibited earnings and expenditures, if any, which occurred, and of the manner in which
these were disposed off.
ii. Information about the Islamic bank’s economic resources and related obligations
(the obligations of the Islamic bank to transfer economic resources to satisfy the
rights of its owners or the right of others),and the effect of transactions, other events
and circumstances on the entity’s economic resources and related obligations. This
information should be directed principally at assisting the users in;
(a) evaluating the adequacy of the Islamic bank’s capital to absorb losses and business
risks;
(b) assessing the risk inherent in its investments and;
(c) evaluating the degree of liquidity of its assets and the liquidity requirements for
meeting its other obligations.

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iii. Information to assist the concerned party in the determination of zakat on the
Islamic bank’s funds and the purpose for which it will be disbursed.
iv. Information to assist in estimating cash flows that might be realized from dealing
with the Islamic bank, the timing of those flows and the risk associated with their
realization. The information should be directed principally at assisting the user in
evaluating the Islamic bank’s ability to generate income and to convert it into cash flows
and the adequacy of those cash flows for distributing profit to equity and
investment accountholders.
v. Information to assist in evaluating the Islamic bank’s discharge of its fiduciary
responsibility to safeguard fund and to invest them at reasonable rates of return, and
information about investment rates of returns on the bank’s investments and the rate of
return accruing to equity and investment accountholders.
vi. Information about the Islamic bank’s discharge of its social responsibilities.

1. Determine the rights and obligations of all interested parties, including rights and
obligations resulting from incomplete transactions and other events, in accordance with
the principles of Shariah and its concepts of fairness, clarity and business ethics.
2. Subscribe to the safeguarding of Islamic banks’ assets, rights of Islamic banks and
rights of others in an adequate manner.
3. Subscribe to the enhancement of management and Islamic banks’ productive
capabilities, and encourage compliance with the established goals and policies, and
above all Islamic Shariah, in all transactions and events.
4. Provide through financial reports useful information to report users, and thus enable
them to make legitimate decisions in their dealings with Islamic banks.
On the other hand, the objective of financial reports are to provide the following kinds
of information :
1. Information about the Islamic bank’s objectives and the extent of its compliance with
Shariah. And, if the bank is partly engaged in prohibited dealings, information about the
separation of such dealings and how to dispose of them.
2. Financial information assisting users to evaluate the adequacy of the Islamic bank’s
capital, risks inherent in investment, and degree of liquidity for meeting the outstanding
obligations.
3. Information to assist in the assessment of Zakah on Islamic banks’ funds and the
targets of its dispersal.

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4. Information about cash flows, their timing, and associated risks. This will help users
evaluate an Islamic bank’s ability to generate sufficient dividend income for equity and
profits for investment holders.
5. Information to assist in evaluating the Islamic banks’ discharge of its fiduciary
responsibility, to safeguard funds and invest them at reasonable rates of return. This
includes information about investment rates of returns on the bank’s investments and the
rates of return accruing to equity and investment holders.
ISLAMIC WORLDVIEW
The worldview of Islam encompasses both worldly aspect and the religious aspect, in
which the worldly aspect must be related in a profound and inseparable way to the
religious aspect, in which the religious aspect has ultimate and final significance. The
worldly aspect is seen as a preparation for the religious aspect. Everything in Islam is
ultimately focused on the religious aspect without thereby implying any attitude of
neglect or being unmindful to the worldly aspect. Islam developed its own concept of
accountability. The concept of taklif (accountability) means that everyone is accountable
for his actions or inactions on the Day of Judgment. Taklif is clearly differentiated from
its non-Islamic counterparts by insisting that each person is responsible for his own
deeds. Accountability in Islam also means that people must accept all the duties and
liabilities as well as the benefits of any ownership or responsibility. However, neither
the Prophet nor other humans have the right to decide what is right or wrong for humanity
or to define the rightful behavior in life; only God can do that. If Man uses his will and
ability for any purpose other than those for which they were created, he will have failed
in his responsibility, violated the honor of his duties, and missed the purpose of his
existence. In Islam, accounting should function not only as a service activity providing
financial information to the users and to the public at large but more important
accountants should discharge their accountability by providing information to enable
society to follow god’s commandments.
1. The Principle of Equality
The Islamic teachings apply to all. There is no distinction between black and white, man
and woman, noble and humble, rich and poor, king and beggar, strong and weak, eastern
and western, learned and ignorant, old and young, or between those who are present and
those who will come in the future, for all of these share human nature and that which it
implies in common.
Equality of this sort is limited to Islam; other ways, each in its own measure, have certain
discriminatory principles. For example, Hinduism distinguishes fundamentally between
Brahmins and non- Brahmins and between man and woman; in Judaism a distinction is
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made between the children of Israel and the Gentiles, and in Christianity between man and
woman.
As for secular social systems, in these there is a distinction between subjects of a country
and foreigners. It is only Islam which considers humanity as one and has uprooted
completely the principle of distinction and discrimination.
2. The Principle of Realism
In view of the fact that man is provided with the instinct of seeking reality and of discerning
between the real and the unreal, the laws and injunctions laid down by Islam are based upon
a correspondingly realistic view of things.
This can be explained as follows: Although man in his natural activity is stimulated towards
his vital goals by feelings and emotions, he in fact sets out after real goals, not illusion and
fantasy. The newly born baby who cries in his hunger and reaches for his mother's breast in
search of milk desires that which is milk in reality, not the illusion of milk; he cries from
real hunger, not from fantasy and imagination.
Every individual who strives in the way of achieving his own interests seeks his own real
interests, not their mental concept. In the same manner when feelings and emotions present
certain desires to man, and without being able to take into account his true best-interest
stimulate him toward certain goals, it is the faculty of discrimination or reason which
harnesses and modifies these emotions and shows to man that which is in reality the good
and the evil and the rightness and the wrongness of his action.
The laws and injunctions brought by the Prophet of Islam are based upon a realistic view of
things, not upon the whims and fancies of men. That is to say that man must perform that
action which is really and truly in his best interest even if it is against his fancy; and he must
avoid that action which he feels like performing but which is not in conformity with his real
interests.
3. The Principle of Equilibrium between the Material and the Spiritual
The third result of Islam's message being directed at natural man, a result which is indeed
one of the great achievements of this religion, is that a middle way is taken between
materiality and spirituality.
This is in contrast to Judaism, which, as can be observed in its Holy Book, the Torah, is not
concerned with spiritual matters, and with Christianity, which on the contrary-according to
the explicit sayings of Jesus-is not concerned with the material life of this world.

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Other religions such as Hinduism and Buddhism and even Zoroastrianism, Manicheanism
and Sabeanism, which to one degree or another are concerned with spiritual things, have
separated the spiritual way from material life, to the extent that the connection between the
two has been totally severed.
It is only Islam which chooses the middle way and bases itself upon the foundation of
primordial human nature. towards his God, and include expressions of servitude in the face
of His Lordship, poverty and need in the face of His Wealth and Independence, lowliness
in the face of His Grandeur, insignificance in the face of His Majesty and Glory, ignorance
in the face of His Knowledge, incapacity in the face of His Power, and submission in the
face of His Will.
Moreover, to the extent possible these expressions have been given a social character, such
as in the case of the groups which gather for the daily congregational prayers, the larger
groups which meet for Friday prayers, and the still larger gathering which takes place at the
time of the pilgrimage to Mecca.
A second portion of these injunctions concern duties which man has in social surroundings
and in relation with his fellow man. Of course in these duties, which are the Islamic laws,
the sense of responsibility towards God has been taken into account, for man must surrender
only to His Will (that is, the requirements of His creation). In other words, all actions must
be performed in the shadow of the three basic principles of Islam: Divine Unity, Prophecy,
and the Last Day.
4. Knowledge and Wisdom from the Point of view of Islam
The person who has made a cursory study of the religions and creeds of the world will have
no doubt that the dignity and honor which Islam has accorded to knowledge and wisdom
and the extent to which it has encouraged their acquisition is unparalleled in any other
religion or ideology, whether revealed or non-revealed.
Opening the eye of discernment towards the eternal world, they are prepared to contemplate
without the veil of materiality the radiance of the Majesty and Grandeur of God, to traverse
the stages of human perfection which must be crossed upon leaving this fleeting life, and to
enter into the Proximity of the Divine. With such men Islam converses secretly of the divine
mysteries in a language which they alone understand, and thus it guides them from the
depths of ignorance to the pinnacle of knowledge and wisdom.

Definition of Islamic worldview

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 A mental framework, mental attitude, a totality of concepts, ultimate foundation of all
human conduct, scientific, philosophical and technological activities developed by the
individual throughout his/her life (Alparslan)
A comprehensive Islamic design of reality relating to human life, the epistemology of
the Divine Unity, the world reality and the world system derived from divine source
(Choudhury)

CHARACTERISTICS OF ISLAMIC WORLDVIEW

Al – Rabbaniyyah (Divine origin)
Al – Thabat (The Permanent Realities)
Al – Shumul (Comprehensive)
Al - Tawazun /Al - Wasatiyyah
Al – Waqiyyah (Realism)
Al – Ijabiyyah (Dynamism)
Al - Tawhid ( the Oneness of Allah)
Divine Origin (Al-Rabbaniyyah)
Divinely-revealed guidance originated from divine source and ordained by Allah with
all its constituents and characteristics (Q.6:151)
Rabb means Lord for all creatures, (no proper equivalent meaning in English for
Rabb), its Creator, Owner, Originator, sustainer, Cherisher, Planner, and the Giver of
security.
Rabbaniyyah means ‘Lordship’ (Q. 3:76), Cherishing, sustaining and bringing
sustaining and bringing to maturity, and Godliness (Q. 10.57, 1:1)
Universal (Shumul)
Islam: message of all time
Message of whole humanity
Message for all aspects of life
Moderation/ Balance (Tawazun)
Balanced creation of nature/universe and humans

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 Balanced in Religion
Balanced ‘Aqidah/belief/thought
Balanced ‘Ibadah(worship)
Balanced in actions
Balanced Akhlaq (ethical values)
Balanced Shari`ah
Al Waqi`iyyah (Realism/practicality)
Practical ‘ Aqidah
Practical ‘ Ibadah
Islamic ‘ibadah maintains variety in its kinds. Physical endeavor such as prayer.
Financial sacrifice such as zakah.The combination between two such as Hajj and
‘Umrah.Some ‘ibadat are made daily, weekly, yearly, and once in a whole lifetime
Practical Akhlaq or Morality
Practical Shari`ah
Provided laws and guidance to lead every aspect of human life in order to
achieve the success of the worldly life and the success of life after death
This concept contains certain unchangeable realities, so all development and changes in
the Islamic society must be within the framework of these permanent realities.
Al - Ijabiyyah (Dynamism)
It is expressed in the active and ongoing relationship Allah with His creations, the
universe, life, and man. also reflects on Man’s activities in his own sphere
Al - Tawhid (the Oneness of Allah)
The Oneness of Allah or known as Tawhȋd , is the paramount constituent of the Islamic
concept. It is fundamental Truth of the faith and chief the Islamic concept
ISLAMIC PERSPECTIVE OF ACCOUNTING
Islamic accounting is the process of identification, measurement and reporting
the legitimacy of financial activities which is useful for decision making, zakat
calculation and calculation of true benefit of Islamic investment operations, according to
the Islam commands. There are different goals for Islamic accounting such as Usefulness

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for decision-making, accountability, Islamic responsiveness and accountability through
Zakat. In this regard, accounting features are focused on measurement and disclosure. In
the field of measurement, dominant opinion is that, for the purposes especially
determining Zakat, we should use the current values. In disclosure aspect, the emphasis
is on following the Sharia and providing the required information, especially in the field
of social responsibilities.
Zaid, (1997) has defined the Islamic accounting as follow: accounting is the
regular process of recording the legitimate trades and measuring the financial results
according to these trades, in order to use them in decision making. Here it’s only main
difference with the traditional accounting definition is the term “legitimate”.it doesn’t
seem that , the traditional accounting can be transformed to Islamic accounting by adding
this term.
AAOIFI has examined the accounting assumptions of the accounting unit concept,
going concern concept, periodicity concept, and the monetary unit concept. It was found
that the accounting unit concept i.e. the entity created as a separate unit of
accountability is acceptable in Islam as it resembles the widely practiced of waqf (trust
foundation)and Baitul Mal (Islamic Treasury) in Muslim traditions. Thus accounting
unit concept requires the identification of economic activities that are associated with
the Islamic Financial institution as a separate entity can be expressed as the institution’s
assets, liabilities, revenues, expenses, gains and losses. The going concern concept is
also applicable as many Islamic Financial contracts especially musharakah and
Mudharabah are for a number of speciFic periods. We have to assume that the contract
shall continue until one or all of the parties involved decide to terminate such contracts.
Going concern is an assumption the business or the entity as a going concern or to
continue for foreseeable future unless there is a signi icant evidence to the contrary.
Thus,this assumption is important especially for Islamic banks as it assumed, based on
financial position and performance,The going concern concept is also applicable as
many Islamic financial contracts especially musharakah and mudharabah are for a
number of specific periods. We have to assume that the contract shall continue until one
or all of the parties involved decide to terminate such contracts. Going concern is an
assumption the business or the entity as a going concern or to continue for foreseeable
future unless there is a significant evidence to the contrary. Thus, this assumption is
important especially for Islamic banks as it assumed, based on financial position and
performance, the continuity of the bank’s activities in the future including its investment
activities.

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 The conventional accounting periodicity concept is also acceptable in Islam on the
basis that even in the case of zakat, it is being paid once a year as a period of
measurement. The concept of haul determined that the wealth must be owned at
least one year to qualify for the payment of zakat. Thus, the periodicity concept for an
Islamic financial institution means the life of the institution can be broken into reporting
periods to prepare financial reports to the interested parties and stakeholders. This will
assist the users to periodically evaluate the institution’s financial performance and
position. In addition, the periodic preparation of the financial statements will be
useful to determine the financial obligations and the financial rights of the bank and
other interested parties. Finally, AAOIFI also found that the stability of the
purchasing power of the monetary unit is acceptable to be used as one of the main
assumption. As financial accounting uses monetary unit of a given currency as a
common denominator, this will assist the users to usefully evaluate the financial
performance and position during a specific. If there is a need to revalue the assets and
liabilities, these can be accounted for and undertaken annually at the end of financial
period and specific disclosures are required. This will assist the users to be provided
proper information on the financial performance and position of a business entity.
ELEMENTS OF FINANCIAL STATEMENTS
The elements of financial statements are the classes of items contained in the financial
statements. The elements of the financial statements include:

 Assets
 Liabilities
 Equity or net assets
 Investments by owners
 Distributions to owners
 Comprehensive income
 Revenues
 Expenses
 Gains
 Losses

1. ASSETS
Assets are the property or legal rights owned by a business to which money value can be

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 attached. In other words, it is an item of economic value that is expected to yield a benefit
in the future. Assets can be classified into:
i. Tangible Assets
Tangible Assets are those assets which have physical existence i.e. they can be
seen and touched Examples of tangible assets are machinery, furniture, building,
etc.
ii. Intangible Assets
Intangible assets are those assets which do not have physical existence i.e. they cannot
be touched and seen. Examples of intangible assets are goodwill, patents, trademarks,
etc.
iii. Fixed Assets
Fixed Assets are those assets which are put to use for more than one accounting period
and its benefit is derived over a longer period.
For example, computer, machinery, land, etc.
iv. Current assets
Current assets are the assets which are readily convertible into
cash and generally absorbed within one accounting period.For example, debtors exist
to convert them into cash, bills receivable, etc.

2. LIABILITIES
According to IFRS Framework, “A liability is a present obligation of the enterprise
arising from past events, the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits”. In other words,
liability is the amount owed by the business to the proprietor and to the outsiders.
Liabilities are generally categorized into 2 broad categories i.e. Current Liabilities and
Non-Current Liabilities.

i. Current Liabilities It refers to those obligations or payments which are repayable

during the current financial year. Examples of current liabilities are Creditors, bills
payable.
ii. Non-Current Liabilities It comprises of those payments which are due for payment
over a long period of time and there is no need to discharge it immediately. For
example Debentures, long term loans, etc.

3. EQUITY
Equity represents ownership interest in a firm in the form of stock. Being precise in the

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accounting terms, it is the difference between value of assets and cost of liabilities of
something owned. It is mainly a residual amount adjusted by the assets against
liabilities.
4. INVESTMENT BY OWNERS
It depicts an increase in equity resulting from transfer of resources in exchange of an
ownership interest .It basically describes any owner’s contribution to the firm. Issue of
ownership shares of stock by a company in exchange for cash represents an
investment by owners.

5. DISTRIBUTION TO OWNERS
It represents a decrease in equity which results from transfer to owners. It determines the
owners’ withdrawal from ownership interest of the firm.
A cash dividend paid by a corporation to its shareholders is an example of distribution
to owners.
6. REVENUE
Revenue is the income that a business earns from its normal business activities. It is an
inflow of assets, which result in an increase in owner’s equity.
Exchange of goods and services for money consideration is an example of revenue.

7. GAINS
Gain is an increase in owner’s equity from peripheral transactions which are irregular
and non-recurrent in nature. For example, Sale of machinery for an amount
greater than its book value (original cost less depreciation) would result in a gain for an
enterprise which is engaged in the business other than that of sale and purchase of
machinery.

8. EXPENSES
are the gross outflows incurred by the business enterprise for generating revenues. An
expense is charged to Profit and Loss Account.

9. LOSSES
Loss is a decrease in owner’s equity from peripherals transactions which are irregular
and non-recurrent in nature.
For example, Sale of machinery for an amount lesser than its book value (original cost
less depreciation) would result in a gain for an enterprise which is engaged in the
business other than that of sale and purchase of machinery.

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 10. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise from transactions
from non-owner sources. It includes all changes in equity of an enterprise other than
those resulting from investments by owners and distributions to owners

ETHICS IN ACCOUNTING

Ethics relate to morals and the treating of moral questions. Ethics also indicates a
philosophical reflection on moral beliefs and practices and ethics is a conscious
stepping back and reflecting on morality. Accounting ethics is an important topic
because, as accountants, we are the key personnel who access the financial
information of individuals and entities. Such power also involves the potential and
possibilities for abuse of information or manipulation of numbers to enhance company
perceptions or enforce earnings management. Ethics is also absolutely required in the
course of an audit. Without meeting the requirements of auditing and accounting ethics,
an audit must instantly be paused.
 Integrity: Integrity isn't a set of rules or a course of action, but rather a state of mind
oriented towards honesty, straightforwardness and a commitment to acting following
principle rather than for the sake of personal gain.
 Objectivity: To the extent that it is humanly possible, accountants shouldn't be
influenced by the interests or perspectives of the individuals or businesses who hire
them. An accountant also shouldn't let personal biases or interests influence either the
numbers that go into an accounting system or the results that come out of it. Figures
and results should be taken at face value and should drive conclusions and decisions.
 Professional Competence and Due Care: The field of accounting isn't a static body
of knowledge but rather an evolving frame of reference that changes as legislation and
best practices are redefined over time. It is the responsibility of an ethical accountant
to stay abreast of these developments and provide clients with up-to-date information
and the highest quality service.
 Confidentiality: Accountants handle sensitive information, and it is an accountant's
ethical responsibility to refrain from disclosing any of this information to outside
parties who may stand to gain from it. Similarly, an accountant shouldn't use any
information obtained while performing professional services for the sake of personal
gain, such as selling stock in a business whose books appear questionable.

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 Professional Behavior: As with any profession, an accountant should perform tasks
and responsibilities with an eye to the highest personal and professional standards.
These include completing tasks thoroughly and on time, following through on
commitments and only accepting payments for services that have been rendered.
 From an Islamic ethical perspective, in order to ful ill this
 expectation of the public, accountants need to understand
 that, irst, they are responsible to the public and, second,
 by ful illing this responsibility (amanah) based on truth
 and justice, their actions will be considered as virtous
 deeds (amal salih). The success or failure of human life
 as viewed by Islam transcends this worldly pleasure to
 the judgement and reward by God in the hereafter. The
From an Islamic ethical perspective, in order to fulfill this expectation of the public,
accountants need to understand that, first, they are responsible to the public and,
second, by fulfilling this responsibility (amanah) based on truth and justice, their
actions will be considered as virtous deeds (amal salih). The success or failure
of human life as viewed by Islam transcends this worldly pleasure to the
judgement and reward by God in the hereafter. The principle of maslahah can
contribute to establishing guidelines for ethical judgement for accountants. In this
sense, the principle of maslahah function as an ethical filter mechanism, by providing
three levels of judgement to be used by accountants when resolving ethical conflicts.

Ethical Dilemmas in Accounting

Although governing bodies and rules of accounting use a clearly stated code of ethics
in accounting, it may create the impression that there are clear and consistent rules for
every accounting situation. However, the situation can be much murkier when you
begin working in real cases. An accountant may be working for two different businesses
and may have access to one company's privileged information that could affect the
well-being of the other company. Company A may be considering investing in
Company B, but the accountant may know from working with both businesses that
Company B is struggling. In this case, the most ethical course of action would be for
the accountant to step back and avoid providing inside information to either company.

Accountants can also face ethical dilemmas when deciding how to report accounting
information; a process that allows for some discretion and judgment calls. Deciding
whether to expense or depreciate a piece of equipment can affect net profit on an

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income statement, which may affect the value of the company that investors evaluate.
It may not be illegal to report the expenditure in a way that adds to the company's value,
but it does skew information in ways that aren't entirely transparent. Similarly, the
decision to allocate an item of expenditure to one department rather than another can
create an imbalance in the success metrics of the departments in question even if the
expenditure was beneficial to both.

There are no clear and easy answers for these dilemmas, but an ethical accountant can
follow guidelines that may make these decisions somewhat simpler. It's important to
think of the spirit behind both the accounting code of conduct and the law, as well as
their specifics. Even if an accountant can't discuss the details of a situation with an
outsider, even just imagining such a conversation can provide him with a valuable
perspective. And although they hardly provide rigorous or objective criteria, intuition
and gut feelings can be helpful ethical guides.

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