This book is intended to be an introductory text for students studying the principles of Islamic accounting as part of a degree in accounting, business studies, economics, finance, or pursuing a master's degree in Islamic banking and finance. It is also intended for students studying for professional qualifications in Islamic accounting, banking, and finance.

In the past, students interested in these areas of study were obliged to use textbooks that ignore the Islamic perspective on accounting. The Principles of Islamic Accounting text addresses this shortcoming by providing an Islamic interpretation of the basic principles of accounting through to the trial balance, the concepts underlying and the preparation of Islamic financial statements, and accounting in a variety of important contexts, such as sukuk, zakat and Islamic contracting.

Specialized Islamic accounting textbooks are needed because of the unique aspects of accounting that are shaped by the Islamic religion. To a Muslim, religious and economic affairs are considered to be intimately connected. Accounting is more than a technical activity. It is also a cultural activity, and in the culture of Islam, religion plays an important part in the formation of accounting practices.

Religious sources in Islam influence business in specific ways. For example, the Quran specifically requires followers to keep proper records of their indebtedness and the payment of zakat. The latter is an obligatory payment of part of the wealth and income of Muslims to those more in need and can be considered analogous to a form of religious taxation. The Quran also prohibits riba (of which interest on a loan is a specific instance), waste and avarice, and all activities under the heading of unfair trading.

The book starts with a discussion of the Islamic business environment in which accounting takes place, explains how Islamic ethical principles apply to the practice of accounting, and describes the institutions and organisations involved in the production and use of Islamic financial reports.

Accounting concepts and principles provide the foundation of an Islamic accounting system. While Islamic accounting shares many of the principles that make the building blocks of conventional accounting, these principles also have to comply with the Islamic Sharia. Chapter 2 explains the main accounting concepts and their compliance with the Islamic Sharia. It describes the importance of market values in Islamic accounting and explains transactions analysis and the recording, posting, and preparation of a trial balance. Chapter 3 deals with the adjustments that are made to produce an Islamic picture of the results of the accounting entity for the accounting period and its wealth at the accounting end date. Chapter 4 details the process of completing the accounting cycle using the accounting worksheet and the process of closing the accounts, correcting accounting errors, and preparing Islamic financial statements.

Bonds are an important part of the finance industry. However, the Sharia prohibition on receiving and paying interest on debts means that the issuing of bonds is not permitted in Islamic financial markets. Thus, for such markets, special Islamic bonds (sukuk) are issued in place of the bonds seen in non-Islamic financial markets. Sukuk are Sharia compliant because no interest is involved and they seek to avoid uncertainty (gharar). Sukuk provide an alternative to conventional fixed-income securities and are often used to finance developmental and capital expenditures by large corporations. The sukuk is now used as an instrument to manage liquidity in Islamic financial markets. The growth of the sukuk market globally has been rapid, as it provides an avenue for the short- and medium-term placement of funds to investors who want to follow the teachings of Islam. Accounting for sukuk is discussed in Chapter 5.

Chapter 6 deals with accounting for zakat, one of the five pillars of Islam. Every practicing Muslim whose wealth exceeds a certain nisab (minimum amount) is expected to pay zakat, the proceeds of which are distributed to those in need. Zakat leads to moral purification and growth, counteracting greed and balancing the search for profit in commerce.

Accounting is mainly concerned with businesses, and in every civilized society these are operated under a set of laws we loosely term commercial law. These laws prescribe the terms and conditions of various types of business contract and affect accounting practices. They also cover situations where there are no specific contracts between parties but legal responsibilities nevertheless exist, e.g. in the case of the tort law of negligence. Hence, accounting practices vary with the legal system in place. Chapter 7, therefore, deals with Islamic commercial law and how it affects Islamic accounting.

In Chapter 8, the application of Islamic financial contracts to accounting is addressed. In particular, this chapter explains murabaha contract rules in the context of AAOIFI and of IFRS standards to accounting for murabaha.

Finally, Chapter 9 provides an account of corporate social responsibility (CSR) reporting from an Islamic perspective. Justice (adalah) and benevolence (ihsan) in Islam are the basic ethos of individuals as well as corporations. While CSR is frequently interpreted from a cost-benefit perspective in the non-Islamic world, in Islam its interpretation is based on the Quran and is of central importance to the ummah (community of believers).

Each chapter contains a set of review questions and numerical exercises designed to help the student achieve the learning objectives set out at the beginning of each chapter. In future editions, we intend to add chapters on Islamic insurance and accounting for banks.

Finally, the authors would like to thank Mr. Jeremy Chia for his patience and accuracy in the preparation of the original manuscript.

This book is accompanied by a companion website:

The website includes:

• Answers for all the questions given in the book.