Basics of Islamic Accounting: Principles and Standards (2026)

Published December 21, 2020 · Updated October 30, 2026

Islamic accounting applies a Shariah framework to how a business records, measures and reports transactions.

In this blog, we discuss how the discipline works: its justice-and-benevolence foundations, the core definitions every practitioner should know, and the standards that govern Islamic financial reporting in Indonesia in 2026. For a deeper comparison, see our guide on the differences between Islamic and conventional accounting.

What Are the Principles of Islamic Accounting?

Two values anchor the discipline: justice in how value is measured and shared, and benevolence toward the community the business serves.

The philosophy traces to two general principles drawn from Shariah. Both are centuries old, yet they map neatly onto modern reporting questions such as fair measurement, lawful income and honest disclosure.

1. Justice (Al-'Adl)

Just, transparent and fair measurement is the baseline. Contract terms, including applicable prices and profit-sharing ratios, should be clear to the parties. Income should be lawful. Non-halal receipts must still be accounted for and disclosed as required, rather than omitted from the records.

2. Benevolence (Ihsan)

Fairness is the floor; benevolence goes further. A business exists to serve the community, not only to earn. Emergency lending is therefore structured as a qard repaid at face value, and products are expected to ease hardship rather than deepen debt.

3. Shariah Compliance: Riba, Gharar and Maysir

Valid contracts are what make the two principles enforceable. Riba includes prohibited increases in loans and certain prohibited advantages in sales or exchanges; gharar is excessive uncertainty about a contract's subject, price or delivery; maysir is wagering on uncertain outcomes. Islamic finance uses sale, lease and partnership structures alongside arrangements such as benevolent loans. Each contract must be assessed under the applicable Shariah requirements.

How Are Assets, Liabilities and Equity Defined?

Assets, liabilities and equity have familiar roles, while investment account funds require particular attention to their contractual rights and presentation.

PSAK 401 addresses presentation of Shariah financial statements. Classification also depends on the contract and applicable standards. The definitions below are the ones practitioners most often get wrong. The table below then sets each definition against its conventional twin.

1. Assets

Economic resources the institution controls and from which it expects future benefits, such as cash, receivables, leased assets or goods held for resale. The Shariah test concerns origin and use: the acquisition and any income the asset produces must both be permissible.

2. Liabilities

Liabilities are present obligations that may require the institution to transfer cash, goods or services. Shariah-compliant financing can create obligations through sales and leases. A noncompliant transaction must not simply be omitted from the accounts; its treatment and disclosure depend on the applicable standards.

3. Restricted Investments

Restricted investments are funds managed subject to conditions set by the investment account holder. Restrictions may concern the investment's purpose, asset, place or method. The agreed contract determines the manager's authority and how returns are shared. Presentation depends on the arrangement and applicable standards; a restriction does not automatically mean the money is invested in one named asset.

4. Equity of Unrestricted Investment Account Holders

Under an unrestricted mudharabah arrangement, the account holder supplies funds and the institution manages them without specified investment restrictions. Returns are shared on the agreed basis. The holder owns the investment funds but is not thereby a shareholder in the bank.

Eligible funds may be presented as temporary syirkah funds, separately from liabilities and shareholders' equity. The classification depends on the contract and applicable standards. Losses and the institution's responsibility for them also depend on the arrangement, including any negligence or breach.

5. Qard

Qard is a benevolent, interest-free loan. The borrower generally repays the principal, rather than an agreed interest return.

A qard is not automatically a top-up to investment account returns. Its recognition depends on who lends, who borrows and the applicable agreement. Review the contract and relevant accounting rules before presenting a loan or any support for investors.

6. Ownership Equity

The residual interest of the institution's own shareholders: assets less liabilities and temporary syirkah funds. This tranche absorbs business risk and holds retained profit.

7. Zakat Funds

Zakat is a religious obligation on eligible wealth, not a corporate income tax. Law No. 23 of 2011 recognises that eligible wealth may belong to an individual or a business. Whether an institution owes zakat depends on the applicable requirements and its circumstances.

A bank may also receive zakat from customers for onward distribution. Customer account deductions require the customer's instruction; they are not automatic. The bank reports zakat sources and distributions under the applicable presentation requirements. The treatment of a dedicated zakat manager may differ.

Which Shariah Accounting Standards Apply in Indonesia?

Applicable entities use Indonesia's PSAK Syariah standards, while AAOIFI standards depend on adoption in other jurisdictions.

Accounting standards for Shariah transactions are issued by Ikatan Akuntan Indonesia (IAI), through its Shariah standards board, DSAS. OJK also supervises Islamic banks under the applicable banking framework. The accounting and supervisory requirements serve different purposes, so institutions must consider both.

IAI's 2024 Shariah standards compilation identifies the current 4xx numbering. The renumbering took effect on 1 January 2024 and did not itself change the standards' substance. The series includes PSAK 401 for presentation, PSAK 402 for murabahah, PSAK 404 for istisna, PSAK 405 for mudharabah, PSAK 406 for musyarakah and PSAK 407 for ijarah. PSAK 409 addresses zakat, infak and sedekah accounting.

Check the edition and effective date relevant to the reporting period. IAI states that revised PSAK 401 and ISAK 403 apply to annual periods beginning on or after 1 January 2027. PSAK 413 on impairment also becomes effective on that date, with early application permitted. These dates should not be mistaken for a blanket revision date for the entire series.

Where no specific Shariah rule applies, the entity must consider the relevant accounting framework and policy guidance. General SAK requirements may also apply alongside Shariah standards. The appropriate framework depends on the entity and transaction.

AAOIFI, an industry body based in Bahrain, publishes financial accounting and governance standards. Their use depends on the rules in the relevant jurisdiction. The comparison table sets the two frameworks side by side. A group with operations in Jakarta and Manama should assess each contract against the applicable local requirements and note differences.

Statutory audit sits on top of all of it. Under Article 68 of Company Law No. 40 of 2007, a company's statements must be audited where, among other triggers, assets or turnover reach IDR 50 billion. We walk through the obligations in our overview of statutory financial auditing and reporting services in Indonesia.

What Are Common Shariah Contracts and Their Accounting Treatments?

Five contracts do most of the work, namely murabahah, ijarah, mudharabah, musyarakah and istisna, each with its own recognition pattern.

In practice, an Islamic financier does not lend at interest. It buys and resells goods, leases assets, or shares profit at an agreed ratio. The table below shows how each common structure reads through the accounting lens.

Two habits prevent most errors in the books. First, match the income stream to the contract: rental for ijarah, margin for murabahah, and a profit share for mudharabah. Second, identify the parties and terms of any qard. Present and disclose it under the applicable rules rather than assuming it is an investment-account reserve.

Conclusion

The discipline is conventional bookkeeping inside a Shariah frame, and the frame changes every answer.

Justice, benevolence and contract-level compliance shape the reporting framework. Noncompliant receipts still require appropriate accounting and disclosure. Definitions such as qard, restricted investments and unrestricted investment account holders then decide where each amount sits. The PSAK Syariah series tells an institution in Indonesia which rule applies, and where it parts from the AAOIFI guidance used elsewhere.

We are a Corporate Services Provider backed by the 3E Accounting International Network across more than 110 countries. We help clients keep Shariah-compliant books and prepare statements under the current standards. Our accounting experts in Indonesia work alongside incorporation, corporate secretarial and tax teams, so reporting fits the whole compliance picture.

Before you go, you may find these useful:

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• Forming a Nonprofit Organization in Indonesia
• How Should Indonesian Startups Set Up Bookkeeping and Financial Controls?

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