Islamic Accounting can be defined as an accounting framework which plans to furnish clients with data empowering them to manage their organizations and associations as indicated by Sharia, or Islamic law. Islamic Account is a swap-free account.
The following definitions set out a general conceptual framework for the Islamic accounting.
An asset is anything that is capable of generating positive cash flows or other economic benefits, either itself or in combination with other assets.
A liability is an obligation arising from transaction or other event that has already occurred and that involves the Islamic bank in a probable future transfer of cash, goods or services, or the forgoing of a future cash receipt, the date of which and the settlement of which are measurable with reasonable accuracy. Generally, a liability should be enforceable under the Sharia’s rules. But if an Islamic bank incurs an obligation which is not valid under the Sharia’s it will still have to be recognized as a liability, although disclosed distinctly as such.
The equity of unrestricted account holders refers to funds received by the Islamic bank from depositors on the basis that the bank will have the right to use those funds without restrictions to finance the bank’s investments within the Shari’ah framework.
Ownership equity in Islamic accounting refers to the amount remaining on the balance sheet date from the bank’s assets after deducting the bank’s liabilities, the equity of unrestricted investment.
The cash and cash equivalent, in Islamic accounting, include local and foreign currency and demand deposits at other institutions.
Restricted investments are assets acquired by fund provided by holders of restricted investment accounts. The Islamic bank does not own these assets. The bank only manages them either for a fixed fee or, for profit.