Principles of Islamic Accounting

CHAPTER 3Adjusting Islamic Accounting Records at the Close of the Accounting Period

Learning Objectives

After studying this chapter, you should be able to:

1. Explain the accrual accounting system and its suitability to an Islamic business environment.
2. Make the necessary end-of-period adjustments to the accounts.
3. Journalise and post closing entries.
4. Prepare an extended trial balance, taking into account the necessary adjustments to the accounts.
5. Prepare the profit and loss account and balance sheet from the extended trial balance.

Chapter 2 dealt with recording transactions as the transactions take place in time. This chapter will deal with all the adjustments that must be made to produce a true Islamic picture of the results of the accounting entity for the accounting period and its wealth at the accounting date.

Trade and commerce are encouraged in Islam. Many verses in the Quran promote honest trade and business activities. People are encouraged to work toward respectful living for their families and support others less fortunate through charitable donations. This can be done through business and trading activities that result in reasonable profits. The generation of profits is, however, not done at the expense of, or through the exploitation of, others, and the welfare of the community is promoted over the rights of the owners of the business.

Companies prepare their financial reports or statements at the end of the accounting period to serve different purposes, including ...