Principles of Islamic Accounting

CHAPTER 8Application of Islamic Financial Contracts to Accounting

Learning Outcomes

At the end of this chapter, you will be able to:

1. State three Islamic financial contracts that are used in the Islamic financial services industry and why these contracts are mainstream.
2. Apply murabaha contract rules to accounting under AAOIFI standards.
3. Explain the meaning of urboun and undertake the accounting entries required for it.
4. Discuss the difference between interest and tawid and journalise the transaction.
5. Explain the time value of money, compounding, and discounting concepts.
6. Define effective rate of profit, internal rate of return, annuity, amortised cost, and the effective profit rate.
7. Compute present and future values of a single cash flow and annuities in Excel.
8. Construct an amortisation table using Excel.
9. Apply IFRS standards to account for murabaha financing transactions.
10. Explain ibra and compute ibra under both AAOIFI and IFRS accounting.
11. Extract the balance sheet and profit and loss account (income statement) for murabaha financing transactions under AAOIFI and IFRS.
12. Journalise the transactions required for murabaha financing initiation, instalments, early redemption, and termination under both AAOIFI and IFRS.

Islamic banking was initially premised on the partnership contracts of mudaraba and musharaka. Unfortunately, due to practical problems, mainly agency costs, these contracts proved untenable, and thus, the murabaha contract of sale tends to dominate the Islamic ...