Objectives and Characteristics of Islamic Accounting:

Perceptions of Muslim Accounting Academicians

in Yogyakarta, Indonesia




By :



Rizal Yaya

Muhammadiyah University of YogyakartaIndonesia




Shahul Hameed bin Mohd. Ibrahim

International Islamic University Malaysia




The quest for the objectives and characteristics of Islamic accounting has become a major concern among Islamic accounting writers. However, Islamic accounting theory has not been tested under different cultural contexts. This research, therefore, aims to extend previous research by exploring the consensus among Indonesian Muslim accounting academicians in Yogyakarta on the objectives and characteristics of Islamic accounting. Based on the statistical tests applied in this research, it is found that the Muslim accounting academicians in Yogyakarta have a strong consensus on some principles which can be used later as a basis for developing Islamic accounting.


Objectives and Characteristics of Islamic Accounting:

Perceptions of Muslim Accounting Academicians

in Yogyakarta, Indonesia



1. Introduction

Wolk and Tearney (1997) state that the diversity of users has been the main obstacle in determining the objectives of accounting. Even within a group of users there is also extensive diversity. Different objectives would also exist in societies other than the capitalist society where conventional accounting was developed. In a socialist society, for example, the objective of accounting is to strengthen the control of the central authorities over the activities of an enterprise (Bailey, 1988). Consequently, in the design of the standardized accounting systems, the central authorities are regarded as the primary users of the information to be generated rather than the capital provider as in the capitalist society (Bailey, 1988). The reason for this different accounting is explained by Hameed (2001) in that a different worldview and values give rise to a different economic system and thus need different accounting systems which are consistent with that system.

Baydoun & Willet (2000) reveal that there are some principles underlying conventional accounting. They are; firstly, clear separation from economic intercourse with religious considerations; secondly, the paramount importance of individual satisfaction; thirdly, profit maximization as the gauge of successful performance; fourthly, acceptance of the rule of the survival of the fittest as the best strategy and, finally, focus on the result of the process without regard for its wider impact on the environment. These principles in the researchers’ opinion, are just like the principles in a belief system of either an individual or society.

Islam, however, has its own worldview and belief system. It is not only a ritualistic religion confined to the individual but an integrated way of life combining politics, economics, culture, religion and every aspect of human life (Haneef, 1997). This means that any separation of knowledge from religious guidance is not appropriate for Muslims as it would result in non-Islamic behavior (Hameed, 2001). Therefore, many Muslim scholars have suggested that the accounting discipline and practices need to be integrated with Islamic teachings and this is hereafter termed Islamic accounting (see Hameed, 2000).            

Hameed (2000) has conducted an extensive study on the perceptions of Malaysian Muslim accountants and accounting academicians on the objectives and characteristics of Islamic accounting. He reveals that there is a positive acceptance by the Malaysian Muslim accountants and accounting academicians towards Islamic values in accounting. However, in the Sulaiman’s (1998) survey on the accountants in Malaysia, it is found that Muslims and non-Muslims are no different in their perceptions on the accounting matter. Similar finding is also found in the extension of her research to the Muslim and non-Muslim accounting students in Malaysia, that there is no significant support to have different character of financial information from what is normally disclosed in Western-based accounting systems (Sulaiman, 2001).

These different findings on the issue of the need of different accounting for Muslim users from the conventional accounting, suggest that there is a need to conduct more empirical research on Muslim society. Therefore to conduct a research in a different country other than Malaysia (i.e. Indonesia and other Muslim countries) will probably be able to provide some sounding findings that can be compared to the previous findings in Malaysia.

            A number of issues will be raised in this paper. The first issue will be on the characteristics of Islamic business activities. This issue will discuss the business environment which is expected to be implemented by Muslims who are dealing with business activities. Following the characteristics of Islamic business activities, the discussion will continue with the alternative objectives for the Islamic accounting. Then the characteristics of Islamic accounting that have been proposed by the Islamic accounting scholars will also be discussed. As this research is based on an empirical research, the research methodology aspects will then be explained briefly and finally the results and discussion will be shown in the last part of this paper.

2. Characteristics of Islamic Business Activities

Islam is basically an ethical and moral code of conduct. This can be inferred from the Hadith narrated from Abu Hurairah, saying that the Prophet Muhammad (pbuh) has been sent only for the purpose of perfecting good morals. Naqvi (1981) views that Islamic ethical and moral code of conduct permeates in human life whether individual or collective in a way that Islam considers ethics as an off shoot of a Muslim belief system or imaan.

Siddiqi (1979) notes that ‘adala (justice) and Ihsan (benevolence) (Al-Qur’an 5:8) could be considered as the summary of the entire morals in economic enterprise derived from the Qur’an. These values in his opinion are the basic values, which offer guidance in almost every action of human life. Therefore Islamic business should also be characterized with these manners.

2.1. ‘Adala (Justice)

Allah has commanded the maintenance of justice under all circumstances and in all aspects of life (Al-Qur’an 6:152; 5:9). Meanwhile the Prophet (pbuh) has also reiterated the maintenance of justice and has sternly against indulgence in injustice. The Qur’an commands Muslim to be just and truthful while bearing witness and while deciding a disputed matter, which is not only among them but also when dealing with their enemies. Muslims are therefore enjoined to cooperate with each other in the establishment of justice and righteousness. On the other words they are not allowed to exploit others and also may not let other exploits them (Ahmad, 1995).

2.2. Ihsan (Benevolence)

Ihsan (benevolence) means good behavior or an act which benefits other persons without any obligation (Beekun, 1997). Siddiqi (1979) views Ihsan is importance in social life as even more than that of justice. If justice is the corner stone of society, Ihsan is its beauty and perfection. If justice saves society from undesirable things and bitterness, Ihsan makes life sweet and pleasant (Siddiqi, 1979). In the business realm, Ahmad (1995) outlines some manners that would support the practice of Ihsan. They are (1) leniency; (2) Service motives; and (3) Consciousness of Allah and of His prescribed priorities.

According to Ahmad (1995), leniency is the foundation of Ihsan. It is a highly praised quality and encompasses every aspects of life. It is an attribute of Allah Himself and Muslims are encouraged to incorporate it in themselves. Leniency can be expressed in terms of politeness, forgiveness, removing of other people’s hardships and providing help. Meanwhile Service motives means that Islamic business organization should consider others’ needs and interest, provide help and spending on others, recommend and support a good cause to others. Therefore through his involvement in business activity, a Muslim should intend to provide a needed service to his community and the humanity at large.

Although the Qur’an has already declared business as lawful, yet engaging in business  should not become a hindrance in remembering Allah and complying with His commands (Al-Qur’an 24:37). A Muslim is required to be mindful of Allah either when he gets success or failure in his business. God consciousness must be the driving force in determining his course of action.

Business activity must also be compatible with the morality and the higher value prescribed by the Qur’an. The believers are exhorted to seek the felicity of the hereafter by making a proper use of the bounties provided by Allah in the present world (Al-Qur’an 28:76-77). They are also asked to recognize and observe the priorities determined by the Qur’an, for instance; (1) to prefer the great and everlasting rewards of the Hereafter to the finite benefits of the present world (2) to prefer that which is morally pure to that which is impure and (3) to prefer what is lawful to that which is not (Ahmad, 1995).

3. The Objectives of Islamic Accounting     

In the issue of the objectives of Islamic accounting, a number of alternative objectives of Islamic accounting have been proposed. They are; (1) decision usefulness, (2) stewardship, (3) Islamic accountability and (4) accountability through Zakat.


3.1. Decision Usefulness

This objective is proposed by the AAOIFI for the Islamic banks. The AAOIFI (1996) in its Statement of Financial Accounting (SFA) no.1, recognized that the objectives of financial accounting determine the type and nature of information which should be included in financial reports in order to assist users of these reports in making decisions (SFA para 25). Therefore, financial reports should provide the information which is useful for users, such as; (a). Information about the Islamic bank’s compliance with the Islamic Shariah (SFA para 37); (b) Information about the economic resources and obligations and the effect of transactions, other events and circumstances and related obligations (SFA para 38); (c) Information to assist the concerned party in the determination of Zakat on the fund (SFA para 39); (d) 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 (SFA para 40); (e) Information to assist in evaluating the Islamic bank’s discharge of its fiduciary responsibility to safeguard funds and to invest them (SFA para 41); and (f) Information about the Islamic bank’s discharge of its social responsibility (SFA para 42).

Despite its listing of other objectives which are Islamically inclined, the underlying framework of AAOIFI’s conceptual framework seems to be in line with those currently being practiced in conventional accounting. For example, in the Statement of Financial Accounting Concepts (SFAC) no.1 issued by the Financial Accounting Standard Board (FASB) in the United States, it is stated that the financial report should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (SFAC para 34). This is evidenced by the fact that SFA-AAOIFI no.1 paragraph 25, mentions the role of financial reporting in the economy is to provide information that is useful in making business and economic decisions

In our opinion, both the AAOIFI and the FASB accept the traditional view that relevant information for users is information about the company’s financial position and performance. In fact, financial performance has to do with how successful a firm is in achieving its overall goal which, it is assumed, is to make a profit (Kam, 1990). Therefore, financial performance is directly linked to profitability. Presumably, the greater the amount of profit,  the greater the achievement of the firm (Kam, 1990).

Henderson and Peirson (1988) assert that the decision usefulness can be extended to include the needs of those parties who seek to exercise an overview or monitoring role over the social performance of the corporation. However, most of the literature on decision usefulness relates only to the needs of shareholders and creditors (Kam, 1990). Therefore, useful information is mainly associated with, (1) the ability to predict when the investor will receive dividends and the amount involved (or how much they would receive if they were to sell their shares) and (2) the ability to know if the company is able to pay a creditor’s loan (or how much they will receive if they were to sell or redeem their bonds).

Since naturally the investors and creditors hope that their cash receipts will exceed their cash outlays, the company then is directed towards increasing its ability to generate favorable cash flows (Kam, 1990).  In this case, decision usefulness is a suitable objective to support an organization to achieve such goals.

3.3 Stewardship

Stewardship accounting has been practised since ancient times and was particularly important at the time to establish the credibility of their tenant to the often-absent landlord (Mathews and Pereira, 1996). Chen (1975) notes that the concept of stewardship arose from the religious teachings, mainly Christian, that man is a steward of God for the resources given to him. Man as God’s steward owes a responsibility to use the property effectively not only for himself but also as a social responsibility for others around him. This concept developed in the feudal version of stewardship where resources, especially lands were given to the serfs to manage on the landlord’s behalf.  Here the serf was responsible for taking care of the land for the landlord whereas the landlord had to discharge his social responsibility for the serfs and his family.

Then, since the middle of the nineteenth century, the concept of stewardship in accounting has referred to the separation of ownership and capital, which resulted from the development of the joint stock company structure. At this time, the classical form of stewardship, developed in a different way that the managers who were servants of the capital providers recognized only the stewardship to their masters and ignored, their social responsibility (Chen, 1975). Meanwhile, the financial statement became a way of demonstrating that the resources entrusted to management had been used in a proper manner. In terms of external reporting, the emphasis of stewardship is on showing that investments have been made in productive assets in an attempt to meet the organization’s objectives. This requires a balance sheet and profit and loss accounts, so that owners can trace aggregate financial movements during a certain period (Mathews and Pereira, 1996). The current stewardship concept is quite close to the decision usefulness concept, but the information for stewardship is basically less than the decision usefulness. This is because in stewardship (1) potential investors and creditors are not included as users; (2) it is not intended for the prediction model of users and (3) it mainly looks at the past to see what has been accomplished (Mathews and Pereira, 1996).

AAOIFI (1996) also recognizes stewardship as one of its objectives.  It points out that the objective of financial accounting is to contribute to the safeguarding of the assets, and to the enhancement of the managerial and productive capabilities of the Islamic bank while encouraging compliance with its established goals and policies (SFA para 33 – 34). Mirza and Baydoun (2000) support this objective and suggest that the stewardship function must be the focus of attention of accountants of Islamic institutions in reporting to external parties.

Meanwhile, SFAC-FASB no. 1 also suggests that financial reporting should provide information about how the management of an enterprise has discharged its stewardship to shareholders for the use of the enterprise resources entrusted. The stewardship is maintained not only in the custody and safekeeping of resources but also for their efficient and profitable use and for protecting them to the greatest extent possible from an unfavorable economic impact such as inflation, deflation and technological and social changes (SFAC para 50). 

3.4. Accountability

Accountability is said to be a broader concept than stewardship. Gray et.al. (1996) define accountability as the duty to provide an account or reckoning of those actions for which one is held responsible. This definition takes accountability as a form of principal agent relationship. In this form, an Accountee (principal) enters into a contractual relationship with an Accountor (agent). The Accountee gives the power over resources along with instructions about actions and rewards to the Accountor. On the other hand, the Accountor is supposed to take certain actions and refrain from others in managing the resources given to him to meet certain objectives and to account to his principal by giving information about his actions to him.

In contrast to Gray et.al. (1996), Hameed (2000) extends accountability to undertake (or to refrain from) certain actions in addition to providing an account of these actions as mentioned by Gray et.al. (1996). Hameed (2000) also adds a metaphysical dimension of accountability to God, discharged through accountability to society. In this case, Hameed (2000) suggests that Islamic accountability can be regarded as the primary objective of Islamic accounting.

Besides the Islamic accountability model as suggested by Hameed (2000) other kinds of accountability objective is also proposed as the primary objective of Islamic accounting. This type of accountability is based on the Zakat obligation and used to be called with the accountability through Zakat (see Adnan and Gaffikin, 1997). The following section will discuss each of these suggestions.

3.4.1. Islamic Accountability

Hameed (2000) starts his argument on Islamic accountability with Faruqi’s (1992) description of the concept of Khilafah (vicegerency). 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 (Al-Qur’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 thereof but man undertook it (Al-Qur’an 33:72).

Tazi-Saud (1991) notes that the trust constitutes such a heavy responsibility that even the Heavens, the Earth and the Mountains did not feel prepared to bear it. Man as the one who accepted the trust, therefore should be aware of fulfilling it, since this will be accounted for. Man is not only accountable for the spiritual aspects but also for social, business and contractual dealings as Allah also commands man to give back things that have been entrusted, to whom they are due (Al-Qur’an 4:58). This command then is detailed in another verse of the Qur’an that man should fulfill (every contract) because for (every) contract will be questioned (on the day of the judgment) (Al-Qur’an 17:34)

Hameed (2000) suggests that this kind of accountability can be used as the main objective of Islamic accounting which he then names Islamic accountability. From a practical point of view, this suggestion is supported by Khir (1992) who asserts that this concept is so ingrained in the Muslim community that it will give the greatest motivation for the practical development of Islamic accounting.

Islamic accountability as explained by Hameed (2000) is premised on both the accountor (Islamic/Muslim organizations) and the accountee (owners) having dual accountabilities. The first or prime accountability arises through the concept of Khilafa whereby a man is a trustee of Allah’s resources. This primary accountability is transcendent, as it cannot be perceived through the senses.  However, it is made visible through the revelation of the Qur’an and Hadith, which are the main sources of Islamic teachings.

Meanwhile, the secondary accountability is established by a contract between an owner or investor and a manager. To discharge both the primary and the secondary accountabilities, the company should identify, measure and report the socio-economic activities pertaining to Islamic, social, economic and environmental issues.

Further, based on Islamic accountability, subsidiary objectivities can be determined such as shariah compliance, assessment and distribution of Zakat, equitable distribution of wealth among stakeholders, the creation of a cooperative environment and solidarity and other type of reports that can contribute in providing information of and encouraging the enterprise to participate in solving contemporary the  Ummah’s (society) problems (Hameed, 2000)

3.4.2 Accountability through Zakat

Based on the deductive approach that they use, Adnan and Gaffikin (1997) assert that the primary objective of Islamic accounting information is the provision of information to satisfy an accountability obligation to the real owner (Allah).  Therefore, the overall accountability will be better operationalized, if it is directed towards the fulfillment of the Zakat[1] obligation. They argue that by making Zakat the primary objective, one tends to avoid the unwanted practice of cheating or window-dressing in any form, as he or she believes that Allah always watches him or her.  Consequently, accounting information will indirectly fulfill its users’ needs as well as its societal responsibility (Adnan and Gaffikin, 1997).

Triyuwono (2000) also suggests that Muslim organizations should be Zakat oriented instead of profit oriented as they are now.  This means that the net profit is no longer used as a basis of performance measurement as it is replaced by Zakat oriemtation.  Therefore, an enterprise is directed to the achievement of higher Zakat payment.  To achieve a Zakat oriented enterprise, it needs to maintain a Zakat oriented accounting system.  Triyuwono (2000) believes that the use of Zakat oriented accounting would result in a more Islamic organization as it implies certain features. Firstly, the transformation from profit maximization to Zakat maximization.  Therefore, profit is only regarded as an intermediary goal while Zakat is the primary goal. Secondly, since Zakat has been taken as the ultimate goal, any activity policy of the enterprise must comply with the Islamic Shariah[2].  Thirdly, it would inherently incorporate a balance between individual character and social character. This is because Zakat concept encourages Muslims to make profits (under Shariah guidance) and to distribute some of them as Zakat representing one’s concern for social welfare.  Fourthly, the enterprise would be encouraged to participate in releasing humans from the oppression of economic, social and intellectual factors and releasing the environment from human exploitation.  Fifthly, it provides a bridge between the world and the Hereafter as Zakat raises human consciousness that any worldly activities are related with their destiny in the Hereafter.

In our opinion, putting Zakat as the ultimate objective would entail narrowing the Islamic view on economic issues. Although, there is no doubt that Zakat is one of the main pillars in Islam and should be upheld, it is simplistic to say that Zakat would solve the remaining economic problems. In fact, Islamic socio-economic objectives involve a wide range of concerns.  In our view, Zakat is only one of the main instruments to achieve such objectives alongside other instruments.

Pertaining to this issue, Chapra (1992) reminds us that an Islamic system in business should be able to achieve the maqasid al-Shariah (objectives of the Islamic teachings) which includes everything that is needed to realize falah (success in the world and the Hereafter) and hayat tayyibah (good life) within the constraints of the Shariah. Even if Zakat accompanied by behavioral norms and the prohibition of interest could be established, they still cannot carry the burden and responsibility of realizing the maqasid. As Chapra (1992) commented, it is just like looking at the skull, chest, and legs of a skeleton and saying that this is the human being.


4. Characteristics of Islamic Accounting     

After discussing the objectives of Islamic accounting in the previous section, the researchers will continue to delve deeper into the issues of the characteristics of Islamic accounting. Mainly, the debates on the characteristics of Islamic accounting are focused on two aspects (1) financial measurement and (2) disclosures and presentations. Therefore, the following section will discuss those two aspects of Islamic accounting characteristics.

4.1. Financial Measurement Aspects

Most of Islamic accounting literature takes Zakat as a cornerstone of determining measurement tools. There are, at least, three reasons for taking Zakat as the main focus of measurement issues. Firstly, Zakat is a concept in Islam that deals specifically with the measurement of assets. This can be inferred from some verses in the Qur’an and Hadith of the Prophet Muhammad (pbuh) regarding the timing and the way in which Zakat is calculated. Secondly, Zakat has been decreed in many verses directly after the ordinance of prayer and considered as one of the five pillars of Islam. This implies that Muslims are encouraged to establish instruments (including accounting instruments) in order to ensure this obligation can be fulfilled in accordance with the Shariah of Islam. Thirdly, the development of accounting in the early Muslim government are closely related with the practice of Zakat. During that time, the Islamic State had already provided accounting books and reports for the determination and accountability of Zakat (Zaid, 1997).

In valuing Zakat, the majority of jurists appear to have concluded that it should be based on the selling prices prevailing at the time Zakat falls due (al-Qardhawi, 1988). This implies that in accounting, Islamic business organizations should apply current cost rather than historical cost which is widely used at this time (Adnan & Gaffikin, 1997; Baydoun & Willet, 1997 & 2000; Clarke et al, 1996; and Haniffa & Hudaib, 2001). Besides that, some accounting principles related to the measurement also need to be redefined. For instance, Haniffa & Hudaib (2001) argued that what is meant in Islamic accounting by the conservatism principle is not the selection of the accounting techniques that has the least favorable impact on owners but more towards the selection of accounting techniques with the most favorable impact on society i.e. better to overestimate funds for Zakat purposes.

The AAOIFI (1996) recognizes the current value concept of assets, liabilities and restricted investments in its statement of accounting concepts.  However, due to the lack of adequate means, such a concept is not recommended. Instead of that, historical cost remains to be applied and the use of the current value financial statement is only regarded as supplementary information if the enterprise considers its importance for the potential investor and other users. Therefore, in practice, it is the historical cost which is applied by Islamic banks (Shihadeh, 1994).

Mirza and Baydoun (2000) view this issue differently in that Islamic accounting is likely to use both historical cost and market selling prices. Therefore, an Islamic accounting system would have a dual system of asset valuation. This argument is based on the premise that an Islamic enterprise needs to adhere both to the contract and discharge its obligation on Zakat. Since contract is based on past transaction and Zakat  is based on current valuation, then the measurement needs to conform to each purpose.

Mirza and Baydoun’s assertion (2000) on the application of historical cost in all (except for Zakat purposes) accounting calculations, is based on the arguments that historical cost is a highly reliable source of information about a firm’s assets, private debts, the firms operation and cash management.  In their opinion, historical cost also fits well into the concept of stewardship, which they believe is the objective of Islamic accounting. The historical cost method could highlight the fiduciary responsibility of the managers and their stewardship function. This method is most appropriate because contracts are written in historical cost numbers and this has survived over the centuries and if there were a more efficient valuation method it would have displaced the historical cost system long ago.

In our opinion, unlike the current valuation method, historical cost has no Shariah basis to be applied in an Islamic enterprise. The contract fulfillment principle in Islam cannot be used as the basis for applying historical cost for measurement purposes as contract itself is a kind of past activity but for the future realization[3]. Therefore, at the time of measurement, it is the current valuation which should be used. In this case, the use of historical cost could corrupt the principles of disclosing the truth (Al-Qur’an 2:42) and forbidding withholding it (Al-Qur’an 83:7). These principles encourage every enterprise to disclose the truth as it is, with neither understatement nor overstatement. On the other hand, the historical cost reflects a type of conservatism that would lead to the understated valuation in time of inflation.

4.2. Disclosure and Presentation Aspects

Haniffa & Hudaib (2001) propose that the importance of disclosure and presentation is to fulfill the duties and obligations according to the Islamic Shariah. To achieve this purpose, an Islamic enterprise is expected to disclose at least: (1) any prohibited transactions they made; (2) Zakat obligation they have to pay and have already paid; and (3) social responsibility. Social responsibility would include charities, wages to employees, and environmental protection.  This means that financial reporting in an Islamic society is likely to be more detailed than what is currently prevalent in Western societies.

Baydoun and Willet (2000) view that social accountability and full disclosures are the basis of Islamic corporate reports. They suggest the current value balance sheet be included as part of the reporting requirements of firms operating in an Islamic economy. Meanwhile, the income statement should be relegated to the notes because of its corruptive influence in directing people to become highly profit oriented. Instead of that, from an Islamic perspective, a Value Added Statement (VAS) should be applied. This is because the distributional characteristics of the VAS would support accountability in Islam through co-operative enterprise as opposed to destructive competition (Baydoun and Willet, 1997).

The VAS, however, is basically a rearrangement of the income statement. Therefore, the existence of the VAS to provide a significant difference from an income statement is questionable. Just like the income statement, the VAS is also an ex-post report which would have no influential control on the enterprise’s social aspect for the current year. But to some extent it can still be used by workers to influence the enterprise on policy following the issuance of the VAS in aspects such as bonus payment. Besides, community at large could also use it to enforce the enterprise to be more aware of their social responsibility whereas an income statement has no such specific tools.

From an Islamic perspective, growth should lead to social justice and a more equitable distribution of power and wealth. Meanwhile, the VAS could provide information on wealth distribution between the different sectors of society and is likely to facilitate focusing a firm’s performance from the stakeholders’ point of view (Mirza & Baydoun, 2000). Hence it would promote a conscious policy of redistribution and resource transfers among various groups of society (Sulaiman, 1997).

However, besides the distributional aspect of sources, Islam is also concerned about the acquisition of those sources. Islam requires that the sources acquired should meet the category of halal (permitted). To achieve this category, those sources should be permissible (halal) in nature and also permissible in the process of acquisition. The problem in the VAS is that, it does not provide a space for such consideration as it is only concerned with the distributional aspects of the sources. Therefore, in our opinion, it can be said that the VAS is insufficient in meeting the Islamic requirements for information.

Pertaining to the disclosure presentation issue, Mirza & Baydoun (2000) suggested that the Islamic financial statements require an emphasis on transparency and avoidance of manipulation, which is manifested by the full disclosure principle of Islamic corporate reports. However, Khan (1994) is pessimistic about this principle especially on firms disclosing negative information about themselves i.e. unfair treatment of employees, environmental pollution, cheating income tax calculation. Firms will think that they will be in the grip of the law if they disclose all these matters. Therefore, Khan (1994) suggests that it is only certain transactions, which are lawful in the capitalist framework but unlawful in the Islamic framework (e.g. interest income, interest paid, investment on mark-up without taking any risk and other riba type transactions) that should be adequately disclosed in the financial statements of Islamic business firms. To be adequate, disclosure of unlawful transactions should involve amounts, sources and circumstances which force the firm to engage in such transactions, and the method by which such incomes or assets will be disposed of (Khan, 1994).

5. Research Methodology

Based on the previous sections, the researchers have shown some alternatives of the objectives and characteristics of Islamic accounting. However, in order to know the accepted alternative, an empirical test needs to be conducted. For this purpose, the researchers will use a survey method using self-administered questionnaires in order to get the data from the selected sample. The following sub-sections will discuss briefly the population and sample of this research, the hypotheses and the result of the tests undertaken.


 5.1. Population and Sample

This research takes Muslim accounting academicians (MAAs) in Yogyakarta Province as the research population. The main reason of choosing this province is because the universities in this province are established with a variety of organizational backgrounds, which could represent the variety of ideas and values evolving in Indonesia. Some universities are recognized as actively internalizing Islamic values in their curricula e.g. Universitas Muhammadiyah Yogyakarta and Universitas Islam Indonesia. Some others are recognized as active universities in promoting nationalistic values such as Universitas Veteran Yogyakarta and Universitas Janabadra. One university ‘Universitas Widya Mataram’ is known as actively promoting traditional cultural values. There are also some universities established by Catholic and Christian missionary organizations e.g. Universitas Kristen Duta Wacana, Universitas Atma Jaya Yogyakarta and Universitas Sanata Dharma. Since there is no Muslim accounting academicians in those institutions, they are not included in the sample research. The total number of Muslim accounting academicians in this province is 235 persons working at 18 higher education institutions. In this research, the researchers had distributed 161 questionnaires and 87 of them were successfully collected. Seventy-six of the questionnaires were collected personally, while the rests were posted by the respondents. This research achieved more than 52% response rate in total and almost the same response rate was obtained for both the Islamic and conventional background institutions. Fifty-six respondents or 64% of total samples are from the conventional background and the other 36% are from the Islamic background institutions. This proportion is almost similar with 70:30 proportion of the number of MAAs in conventional background institution to the number of MAAs in Islamic background institution,

5.3. Hypotheses Development

Based on the literature on Islamic economics, we can infer that there is a different set of socio-economic principles between the capitalist and Islamic economic systems. This would imply that the objectives and characteristics of Islamic accounting may be different from conventional accounting. However, since the mainstream accounting is based on the capitalist economic system, there is a possibility for the Muslim accounting academicians to perceive it differently from the Islamic economic system. Therefore, it is important in this research to ask respondents’ perceptions as to whether there is any difference between the objectives and characteristics of Islamic accounting and conventional accounting.

To answer this question, the researchers propose some hypotheses. The first hypothesis is stated in the following figure:


Figure 1 : Hypothesis 1


MAAs in Yogyakarta believe that the objectives of Islamic accounting are the same as the objectives of conventional accounting


MAAs in Yogyakarta believe that the objectives of Islamic accounting are different from the objectives of conventional accounting


To test this hypothesis, the respondents were asked to choose one of the alternatives of the main objectives of Islamic accounting. The alternatives are stated in table 1 in the appendix.

The alternative (a), on decision usefulness, is derived from the current objectives of conventional accounting. To some extent, the AAOIFI as already discussed in section 2 has used this objective in developing accounting standards for the Islamic Financial Institutions. Meanwhile alternative (b), stewardship, is derived from the previous objectives of conventional accounting. Alternative (c), Islamic accountability, is derived from the theory developed by Hameed (2000). Finally, alternative (d), accountability through Zakat is derived from Adnan and Gaffikin (1997). To capture different opinions from the provided alternatives, the researchers allow the respondents to choose option ‘others’ and asks them to specify their answer.

The second hypothesis of the objective and characteristics of Islamic accounting relates to the importance of the users of the accounting information. As already discussed earlier, accounting information is widely influenced by the users of the information. Therefore, it is commonly understood that the type of information provided is the result of the various interests of the users of the accounting information. In conventional accounting, there is a kind of classification of users of accounting information whereby shareholder and potential shareholders are regarded as the primary users. This practice is in line with capitalism that views the capital provider as the centre of wealth creation. Since Islamic accounting has a different worldview, it is possible that there is a difference in the level of importance of users of accounting information between Islamic accounting and conventional accounting. Therefore, the second hypothesis can be stated as follows:


Figure 2 : Hypothesis 2



MAAs in Yogyakarta believe that shareholders are more important than other users of accounting information in Islamic accounting


MAAs in Yogyakarta believe that other users of accounting information in Islamic accounting are at least as important as (or if not more than) shareholders.


To test this hypothesis the respondents will be asked to rank the importance of some other potential users compared to shareholders (see the list of questions in table 2 in the appendix). If the answer shows that other users are more important than the shareholders, it would indicate that there exists a difference between conventional accounting and Islamic accounting in terms of the users of accounting information.

The third hypothesis of the objectives and characteristics of Islamic accounting, focuses on the types of information provided. It is argued that Islam emphasizes social and religious concerns i.e. lawful and unlawful aspects of transactions. This implies that there should be some differences in the information to be disclosed between Islamic based accounting and conventional based accounting. The hypothesis in this area is set up as follows.

Figure 3 : Hypothesis 3



MAAs in Yogyakarta believe that Islamic Accounting does not emphasize social and religious information.


MAAs in Yogyakarta believe that Islamic Accounting emphasizes social and religious information.


To test this hypothesis, the researchers ask the respondents about their perceptions on some Islamic and social information. The questions are organized into two types of statements; type A statement and type B statement (See Table 3 and Table 4 in the appendix). The type A statement is the statement that asks the respondents’ agreement to the given statement. Meanwhile the type B statement is the statement in the form of a comparison with the profit figure information, which is regarded as the ultimate information in the conventional accounting information.

In theory, the characteristics of Islamic accounting would show its preference to the social and religious aspect rather than just a profitability consideration. Therefore, if the respondents show their agreement with the given statements, it could be regarded as an indication that there are differences in the characteristics of the information that needs to be disclosed between the Islamic accounting and conventional accounting.

6. Results and Discussions

6.1. Reliability and Normality Tests

The reliability of this questionnaire is tested by using the Cronbach’s alpha model. Based on the test conducted, the result shows the Cronbach alpha for a set of questions for hypothesis two and three is 0.8672 and 0.8388 respectively. This result is higher than the reliability standard (0.8000) which means the questions provided are reliable in measuring the same variable. Meanwhile in testing normality of the sample variable, the skewness ratio was applied. The skewness ratio is a ratio between the obtained skewness over the standard error of skewness. If the ratio is between negative two and positive two, the variable can be said to be normal (Santoso, 2001). Based on the test conducted to the set of questions for hypothesis two and three, it is found that the skewness ratio of this sample variable is 3.763 and 0.338 respectively, which means the sample distribution is only normal for the hypothesis three. Due to this, hypothesis two will use a non-parametric test.

 6.2. Hypothesis Testing

After conducting validity and reliability tests as well as the normality test, hypothesis testing using the t test and non-parametric sign test was conducted using SPSS analysis tools.

6.2.1 Objectives of Islamic Accounting

The objective of Islamic Accounting (OBJECTVE) variable is obtained from the respondents’ choice on the main objective of Islamic accounting. As already discussed in the previous chapter, there are five alternatives provided. They are (1) decision usefulness; (2) stewardship; (3) Islamic accountability; (4) accountability through zakat and (5) other objective, if the respondent has a different opinion from the above alternatives.

Based on the data obtained from the field research, it is found that 4.76 % (4 cases) of the respondents choose decision usefulness, 3.57 % (3 cases) choose stewardship, 79.77 % (67 cases) choose Islamic accountability and 7.14 % (6 cases) choose accountability through zakat, while the rest 4.76% (4 cases) choose others.  The frequency distribution of the option is shown in Figure 5.13.


Figure 4 : Frequency Distribution of OBJECTVE Variable

The data was analyzed by using a chi square test of frequency. The result is shown in the following table.



Table 5 : Chi-Square Test Frequencies

The difference of the obtained frequency to its expected frequency is significant below 5% confidence level (p value = 0.000) as shown in Table. This means that the probability of the expected frequency being equal is almost nil.

Table 6 : Significance of Testing Hypothesis 1


Therefore it can be said that the Islamic accountability is the most accepted objective as the framework of Islamic accounting


6.2.2. The users of Islamic accounting

The variable of users of Islamic accounting (USER) is constituted by questions Q2.1a-g as noted in the following formula.

USER = mean (Q2.1a, Q2.1b, Q2.1c, Q2.1d, Q2.1e, Q2.1f, Q2.1g)

The distribution of the USER variable is skewed to the right as shown in Figure 5.14 which means that users other than shareholders are as important, if not more as shareholders.


Figure 5 : Distribution of the USER variable


In testing the hypothesis on users of Islamic accounting, one sample t-test with a test value of three will be conducted. The following equation will be used in testing the hypothesis.

   Ho : mean of USER < 3.00

   Ha : mean of USER ≥ 3.00

Since the distribution of this variable is not considered normal, a non-parametric test of one sample Kolmogorov-Smirnov test was applied. The result shows that the obtained mean is 3.2444 and the significant level is below .01 at 95% confidence level (see Table 5.14. Therefore, it can be said that the null hypothesis that MAAs in Yogyakarta believe that shareholders are more important than other users of accounting information in Islamic accounting, is rejected. Instead of that, the alternative hypothesis that MAAs in Yogyakarta believe that other users of accounting information are at least as (or if not more than) shareholders, is accepted.

Table 7: Non-Parametric Test of the USER Variable


In Malaysia, Hameed (2000) also finds that the accounting academicians believe that other users of accounting information in Islamic accounting are at least as important as (or if not more than) shareholders. In his research, Hameed (2000) finds the mean of this test to be 3.4130, slightly higher than the Yogyakarta case.

6.2.3. The Characteristics of Islamic Accounting

The variable of characteristics of Islamic accounting (CHARCT) is established based on questions Q1.7, Q1.8, Q1.9, Q1.11, Q2.2a, Q2.2b, Q2.2c, Q2.2d & Q2.2e. The formula for this variable is set in the following equation.

       CHARCT = mean (Q1.7, Q1.8, Q1.9, Q1.11, Q2.2a, Q2.2b, Q2.2c, Q2.2d , Q2.2e)

The obtained value of this variable is shown in Figure 6.

Figure 6 : Distribution of CHARCT variable


In testing the hypothesis, one sample t-test was also carried out. The hypothesis testing is based on the following equation.

   Ho : mean of CHARCT ≤ 3.00

   Ha : mean of CHARCT > 3.00

The result of the hypothesis testing shows that the obtained mean is 3.7753 which is greater than the critical mean of 3.00.


Table 8: Mean Value of CHARCT Variable




Std. Deviation

Std. Error








From Table 9, it can bee seen that the p value is 0.000 which is significant at 95% confidence level. This shows that the probability of the population mean being 3.0 is almost nil.


Table 9: Level of Significance of Testing Hypothesis 3


Test Value =3



Sig. (2-tailed)

Mean Difference

95% Confidence of the Difference











Therefore, it can be inferred that the null hypothesis that MAAs in Yogyakarta believe that Islamic accounting does not emphasize social and religious information is rejected. Meanwhile, the alternative hypothesis that MAAs in Yogyakarta believe that Islamic accounting emphasizes social and religious information, is accepted.

Hameed (2000) has also tested a similar hypothesis on Malaysian accounting academicians. He finds that the Malaysian accounting academicians believe that Islamic accounting emphasizes Islamic and social information.


7. Conclusion


As a way of life, Islam has a great concern for business activities. Through the revelation of the Qur’an and His Apostle, Allah has shown His guidance to mankind on how to be successful in this world and in the Hereafter while doing business. Since business is closely related to economic problems which involve a wide and complex area, a single instrument e.g. Zakat, would not be sufficient to solve those problems. In fact, it needs all the necessary instruments that can be used to achieve success (falah). Therefore, this would be appropriate to direct Islamic accounting towards the achievement of Islamic socio-economic objective of falah. Hence, in designing an Islamic accounting system, its objectives and characteristics should be able to direct the enterprise not only to provide a true picture of the enterprise but also to encourage them to be Ihsan (benevolent) and discourage them to be unjust.

Based on the result of the test on hypothesis one, it can be said that the objective of Islamic accounting is different from the objective of conventional accounting, which is decision usefulness. Since this consensus is widely supported by the respondents, the development of Islamic accounting could be brought about by providing information that will enable shareholders to ensure that the organization has discharged its accountability in accordance with the Shariah and to induce economic behavior in line with Islamic objectives and values. Then based on hypothesis two testing on the users of Islamic accounting, it was found that MAAs in Yogyakarta believe that the level of importance of users of accounting information is different between Islamic accounting and conventional accounting, whereby in Islamic accounting the shareholder is not necessarily the most important user among the stakeholders.

Finally, on testing hypothesis three on the characteristics of Islamic accounting, it is found that MAAs in Yogyakarta believe that Islamic accounting should emphasize social and religious oriented information. This consensus would imply that there is a need in an Islamic accounting system to provide information to encourage the business organization to behave in an Islamic manner and discourage any un-Islamic behavior that might probably be undertaken by the organization or the users of information. Therefore it can be said that in general the secular ideas have not been successfully internalized among the Muslim accounting academicians in Yogyakarta. Muslim accounting academicians in Yogyakarta are found to have a strong consensus among them on certain principles which can be used later as a basis for developing Islamic accounting




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Table 1: List of Questions for Hypothesis 1



Which of the following statement should be the MAIN objective of Islamic accounting?

Please tick only one of the following boxes



To provide information on the amount, certainty and timing of expected cash flows in order for shareholders to make the decision to buy, hold or sell shares (decision usefulness).




To provide information which will enable shareholders to evaluate how efficiently management have safeguarded and enhanced their assets (stewardship).




To provide information that will enable shareholders to ensure that the organizations have discharged their accountability in accordance with the Shariah and to induce economic behavior in line with Islamic objectives and values (Islamic accountability).




To provide information to enable the proper calculation and distribution of Zakat hence reducing the possibility of creative accounting and thereby automatically fulfilling the needs of other users (accountability through Zakat).




Others, please state:






Table 2: List of Questions for Hypothesis 2


Please show the importance of the following stakeholders as users of accounting information in Islamic perspective (as compared to the shareholders)


Not important at all

Less important

As important

More important

Most important


a. Managers






b. Employees/Trades unions






c. Government






d. Community






e. Creditors






f. Customers/consumer groups






g. Zakat beneficiaries







Table 3: Type A Statement for Hypothesis 3



Strongly disagree


Neither agree nor disagree


Strongly agree


Accounting in the Islamic perspective should not be restricted to a mere monetary account rendering







Accounting in the Islamic perspective should not only record economic events/transactions but should include socio-economic events/transactions of Muslim business organizations







Accounting in the Islamic perspective should attempt to recognize and measure externalities







Accounting in the Islamic perspective should use current values in the balance sheet in order to calculate Zakat fairly







Accounts and annual reports of Muslim business organizations should be Shariah audited to ensure that the organization has conducted its activities in accordance with the Shariah








Table 4 : Type B Statement for Hypothesis 3



Please show the importance of  providing the following information in the annual reports of Muslim business organizations (as compared to disclosure of information on profits)[4]


Not important at all

Less important

As important

More important

Most important


a. Impact of the organization’s activities on the environment






b. Internal employee-employer relationship and working conditions






c. Distributions of salaries, perquisites and wages among different levels of managers and employees






d. Prohibited (haram) activities or financing undertaken by the organization.






e. Social responsibility of the organization to the community








[1] Zakat is a religious obligation and a levy accepted by Islam on a Muslim income and wealth to be distributed to the defined beneficiaries such as the poor and indigent.

[2] Zakat is only payable on lawful earnings and wealth approved by the Shariah and cannot be paid out of unlawful wealth/earning.

[3] An exception tothis may be debt contracts. The OIC Fiqh Academy has referred to considered inflation adjustment indexes on principal.

[4] It is assumed that Islamic accounting will be used mostly by Muslim/Islamic business organizations. Although non-Muslim may use Islamic accounting information, it may not be in accordance with their own worldview.