Islamic Banking Accounting

Our platform's standard accounting methodologies are fully applicable to Shari'ah-compliant deposit products. This guide outlines the specific configurations required to set up daily accruals and manage the accounting rules for these products.

Before proceeding, we recommend you familiarise yourself with our core accounting concepts. Please review the following documentation:

• Before using the account module
• Enabling accounting for deposits
• Creating your Chart of Accounts
• Journal entries
• Accounting reports
• Accounting closure
• Fees accounting
• Inter-branch transfer GL account
• Booking date vs value date
• Accounting methodologies
• Cash-based accounting
• Accrual-based accounting

Configuring accounting rules

The following steps explain how to enable and configure either Cash or Accrual accounting for a Shari'ah-compliant deposit product:

1. Navigate to Administration > Products > Deposits and click New Deposit Product.
2. In the Creating a New Deposit Product screen at Administration > Products > Deposit, select Product category and Profit Sharing: Yes.

• Navigate to Accounting Rules and choose Methodology.
  

Cash accounting setup

With the cash-based method, revenue and expenses are recognized only when money is actually received or paid out.

1. Navigate to Administration > Products > Deposits and click New Deposit Product.
2. In the Creating a New Deposit Product screen at Administration > Products > Deposit, select Product category and Profit Sharing: Yes.
3. Navigate to Accounting Rules and choose Methodology: Cash
4. Select GL accounts from the drop-down list for Profit Expenses and Mudarib Share along with Transaction Source, Savings Control, and Fee Income.
5. Save the product.
   

Accruals accounting setup

With the accrual method, revenue and expenses are recognized when they are earned or incurred, regardless of when the cash is exchanged.

1. Navigate to Administration > Products > Deposits and click New Deposit Product.
2. In the Creating a New Deposit Product screen at Administration > Products > Deposit, select Product category and Profit Sharing: Yes.
3. Navigate Accounting Rules and choose Methodology: Accrual.
4. Select GL accounts from the drop-down list for Profit Expenses and Mudarib Share along with Transaction Source, Savings Control, and Fee Income.
5. Next to Profit Accrued Method, select Daily or Monthly from the drop-down.
6. Save the product.
   

Daily profit accruals configuration

These settings are only applicable if you have selected the Accrual methodology with a Daily profit accrued method.

Setting Initial Profit Rate [ER]

The Initial Profit Rate (ER) is used to calculate the daily profit accrual amount before the final profit distribution is known.

1. Navigate to Profit sharing > Pools > and select a Pool.
2. In the Creating a New Pool screen, navigate to Daily profit Accruals and enter Initial ER (Profit rate) value.
3. Save the product.
   

Defining calculation and booking rules

These settings control how the accrued amount is calculated and when the journal entries are posted.

1. Navigate to Profit sharing > Product, select a Product, and navigate to Actions.
2. In the Actions screen, select View settings.
3. Navigate to Create product settings and Daily profit accruals section.
4. Select the Accrued profit amount calculation method drop-down list and choose one of the following options: Customer profit rate after adjustments, Customer profit rate, Customer profit rate with capped rate.
5. Select the Profit accrual point drop-down list and choose one of the following options: Next accrual date, Current accrual date.
6. Save the product.

Accrued profit amount calculation method

This defines the formula used to calculate the daily accrued amount. Choose one of the following:

• Using Customer profit rate after adjustments - the calculation uses the final daily profit rate after applying any predefined rules (minimum, maximum, or fixed rates).

Formula

1. Customer profit rate = Pool's Equivalent Rate * Customer share percentage. After comparison with min, max, fix predefined profit rate, the system gets Customer profit rate after adjustments

2. Accrued profit amount = (Customer profit rate after adjustments * Eligible account balance * Days in Cycle) /  Days in Year)

• Using Customer profit rate after adjustments - the calculation uses the customer's share of the pool's expected rate without applying min/max/fixed adjustments.

Formula

1. Customer profit rate = Pool's Equivalent Rate * Customer share percentage

2. Accrued profit amount = (Customer profit rate * Eligible account balance * Days in Cycle) /  Days in Year)

• Using Customer profit rate with capped rate - the calculation uses the customer's profit rate but will not exceed the predefined maximum profit rate.

Formula

1. Customer profit rate = Pool's Equivalent Rate * Customer share percentage. After comparison with only predefined max profit rate , the system gets Customer profit rate after adjustments

2. Accrued profit amount= (Customer profit rate * Eligible account balance * Days in Cycle) /  Days in Year)

Profit accrual point

This defines the timing for booking the daily accrual journal entries.

• Current accrual date - journal entries are posted at the end of the day (23:59:59 in your organization's timezone).
• Next accrual date - journal entries for the previous day are posted at the beginning of the new day (00:00:00 in your organization's timezone).
• Every time the profit accrued is booked, the previous day journal entries will be reversed and the new ones with the current profit accrued will be logged.

Journal entry updating process

Each day, the system automatically reverses the previous day's accrual entry and posts a new one with the updated total accrued amount. This ensures that the General Ledger always reflects the precise, up-to-date liability for profits payable.