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Accounting distinctions of partnership finance (Musharakah) and trade (Murabaha) of Islamic financial institutions

Vol. 22, Iss. 12, DECEMBER 2019

PDF  Article PDF Version

Received: 6 August 2019

Received in revised form: 7 October 2019

Accepted: 20 November 2019

Available online: 13 December 2019

Subject Heading: INTERNATIONAL STANDARDS OF ACCOUNTING AND REPORTING

JEL Classification: M41

Pages: 1328–1342

https://doi.org/10.24891/ia.22.12.1328

Subject The article discusses Islamic financial instruments and their accounting recognition by Islamic financial institutions (IFI), specifically focusing on Musharakah and Murabaha as one of the most popular products used in the jurisdiction of the Islamic financial system.
Objectives The study reveals the specifics of partnership financing and trade in the Islamic accounting model.
Methods I apply methods of comparative analysis, systematization, classification, analogy and collation.
Results The article unfolds financial instruments of Islamic institutions, such as Murabaha and Musharakah, specifies the semblance of Musharakah with identical instruments used in Islamic and traditional financial systems. I also enlist key requirements to Murabaha, made accounting entries concerning the instrument.
Conclusions and Relevance The article examines contracts of joint activities Musharakah, its specifics and distinctive features and compares it with the trust finance contract Mudarabah. As part of such contracts, profit and loss are shared among parties in a certain proportion. I provide examples of accounting entries depending on possible results of such joint projects. The article also describes accounting entries on capital construction, project investment, accrual of profit/loss, and allocation of the result among the parties. I give a detailed account of Murabaha, legal force of the contract provided some financing requirements are met. The study also describes the costing of goods or a service, origination of accounts receivable and payable, revaluation of goods and services to be recognized in the balance sheet, and reveals some results of trade finance and the way they are posted to accounting ledgers. The findings are of applied and theoretical significance for accounting practices.

Keywords: Islamic Accounting, reporting, AAOIFI, standards, accounting records

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