Accounting for Mudharabah dan Musyarakah

ACCOUNTING
FOR

MUDHARABAH
&

MUSYARAKAH

NORHIDAYATI MOHD KOSNI
SITI AISHAH MOHAMAD SIS

SITI NASUHA MOHBIN



ACCOUNTING
FOR MUDHARABAH
& MUSYARAKAH

ACCOUNTING FOR ISLAMIC FINANCIAL

INSTITUTION

NORHIDAYATI MOHD KOSNI
SITI AISHAH MOHAMAD SIS

SITI NASUHA MOHBIN

ACCOUNTING
FOR

MUDHARABAH
& MUSYARAKAH

POLITEKNIK SULTAN IDRIS SHAH
KEMENTERIAN PENGAJIAN TINGGI

ALL RIGHTS RESERVED
Issue 2022



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Perpustakaan Negara Malaysia



eISBN 978-967-2860-40-2



Perpustakaan Negara Malaysia
Cataloguing-in-Publication Data

Norhidayati Mohd. Kosni, 1984- ACCOUNTING FOR MUDHARABAH & MUSYARAKAH :
ACCOUNTING FOR ISLAMIC FINANCIAL INSTITUTION / NORHIDAYATI MOHD KOSNI, SITI AISHAH
MOHAMAD SIS, SITI NASUHA MOHBIN.
Mode of access: Internet
eISBN 978-967-2860-40-2
1. Accounting (Islamic law).
2. Financial institutions--Religious aspects--Islam.
3. Finance--Religious aspects--Islam.
4. Contracts (Islamic law).
5. Government publications--Malaysia.
6. Electronic books.
I. Siti Aishah Mohamad Sis, 1985-. II. Siti Nasuha Mohbin, 1992-.
III. Title. 332.088297



Publisher:
Politeknik Sultan Idris Shah
Sg. Lang, 45100 Sungai Air Tawar
Selangor Darul Ehsan
Tel. No.: 03-32806200
Fax No.: 03-32806400
https://psis.mypolycc.edu.my



Writers:
Norhidayati Mohd Kosni | Siti Aishah Mohamad Sis | Siti Nasuha Mohbin

ACCOUNTING
FOR MUDHARABAH
& MUSYARAKAH

PREFACE

Islamic accounting is one of the elements include under
Islamic finance. As a Muslim, we must be aware about the
differences existing between Islamic accounting and
conventional accounting. One of differences related to
contract used in their operation. For example, Islamic
financial institutions used Shariah contract like
Mudharabah and Musyarakah for their business.

This book primarily aimed for students who are taken
Islamic banking and finance course to enhance knowledge
regarding Islamic accounting related to shariah contract.
This topic can help the readers to understand about the
concept Mudharabah and Musyarakah contract in details
and at the same time student can improve their
comprehensive regarding how to record the transaction
occurred in Islamic accounting.

This book also elaborates about Mudharabah and
Musyarakah application and the method used for the any
transaction occurred in the business. There are some
examples for the calculation Mudharabah and Musyarakah
contract. This examples can help the students to be more
understand about the execution of this contract in real
business activities.

The authors hope this book can be a good reference for the
readers to enhance their understanding regarding
Mudharabah and Musyarakah for the accounting recordt

ACCOUNTING
FOR MUDHARABAH

& MUSYARAKAH

SYNOPSIS

The emergence of Islamic banks and other financial
institutions since the 1970s has stimulated a modern
literature that has identified itself as addressing “Islamic
accounting”. The term of “Islamic accounting” may simply
be a convenient label to group together quite disparate
accounting practices and ideas across time and space.

In the development of Islamic finance, it has been said
about the limited record of Islamic financial institutions
applying risk-sharing principles in the financing product,
especially Mudarabah and Musharakah. Mudharabah
and Musyarakah refers to profit sharing and profit/ loss
sharing contract had been used especially in the Islamic
banking operation. The transaction will be recorded
based on the format stipulated by the regulatory bodies
in Malaysia

TABLE OF
CONTENTS

1 Introduction of Islamic
contract

Definition of

4 Mudharabah

Types of Mudharabah

i. Application and

7 accounting treatment
ii. Exercise

37 Definition pf
Musyarakah

41 Types of Musyarakah
i. Application and
accounting treatment
ii. Exercise

Life is like

ACCOUNTING

Everything must

be balanced

-unknown

1

Partnership is considered as the element of Islamic
banking. Therefore, Islamic banks are supposed to rely on the
partnership contracts for acceptance of deposits and investment of
funds in their operation. In practice, Islamic banks usually adopt
partnership contracts for accepting deposits and rarely used while
investing. However, in real practice Islamic banks rely heavily on
non-partnership contracts for investment of funds.

Partnership, commonly known as the profit and loss
sharing (PLS) paradigm, allows a financial institution to earn profit
on invested capital if the financial institution can tolerate loss in
case of the project failure. The allocation of reward and risk to each
partner, and the distribution of responsibilities among them are
stated in the contract which is enforced by the social values and the
ethical standards set in the Shariah. Any requirements must be
followed by the both parties to ensure the contract is considered as
valid from Shariah perspective.

2

Contracts based on the partnership principle include
Musharakah and Mudharabah. Musharakah contract is a type of
partnership where all partners jointly contribute capital and
manage the business venture Profits are shared based on a pre-
negotiated ratio, while losses are borne in proportion to the capital
contributed by the partners.

On the other hand, a Mudharabah contract is a type of
partnership between investor(s) (Rabb al-mal) and entrepreneur(s)
(Mudarib), where the investor contributes capital while the
entrepreneur employs labour and manages the venture. Profits are
divided according to a pre-determined ratio, while the losses are
exclusively borne by the investor.

Partnership

Musharakah
Mudharabah

3

4

Mudharabah ?

is a partnership, in which one or more
parties (Rab al mal or sahib mal) who
provide the capital, contract with another
party (the Mudharib) who provide the

labor, management expertise or
entrepreneurship.

The features of Mudharabah:

i. Profit sharing ratio between the Rab
al mal and the Mudharib(Islamic
bank) is agreed beforehand.

ii. Any losses, other than those
incurred due to negligence or
mismanagement of the Mudharib is
borne by the Rab al mal, the
Mudharib loses his labor as he is not
paid any salaries or fee.

5

Mudharabah

• It is a partnership in profit between capital and work. It
may be conducted between investment account
holders as providers of funds and the Islamic bank as a
Mudharib, the sharing of profits being as agreed
between the two parties, and the losses being borne
by the provider of funds except if they were due to
misconduct, negligence or violation of the conditions
agreed on.

• Mudharabah contract may also be concluded between
the Islamic bank, as a provider of funds. Mudharabah
differs from what is known as speculation which
includes an element of gambling in buying and selling
transactions.

6

The investment account holder
authorizes the Islamic bank to invest

the account holder’s funds in a
manner which the Islamic bank deems
appropriate without laying down any
restrictions as to where, how and for

what purpose the funds should be
invested. Under this arrangement, the

Islamic bank can commingle the
investment account holder’s funds
with its own funds or with other
funds, the Islamic bank has the right

to use

7

The investment account holder
imposes certain restrictions as to
where, how and for what purpose his
funds are to be invested. For example,
investment account holders may
require the Islamic bank not to invest
their funds in installment sales
transactions or without guarantor or
collateral or require that the Islamic
bank itself should carry out the
investment itself rather than through

a third party.

8

where there is one capital
provider and one entrepreneur
(can be an organization such as an

Islamic bank).

RAB AL MAL ISLAMIC INVESTMENT
(CAPITAL BANK
PROVIDER)
(MUDARIB)

9

Where there are at least two capital
providers and one entrepreneur

RAB AL MAL 1 ISLAMIC INVESTMENT
(CAPITAL BANK
PROVIDER)
(MUDHARIB)
RAB AL MAL 2
(CAPITAL
PROVIDER)

10

01 02 03 04

RAB AL MAL ISLAMIC ENTREPRENEUR INVESTMENT
(CAPITAL BANK (MUDHARIB 2)
PROVIDER)
(MUDHARIB 1)

The entrepreneur sources and
hires another Mudharib under
another Mudharabah contract

11

Current & Investment Shareholders
Saving Deposit Fund
Deposit

Pool of Funds

Sales Investments Financing

12

2000
1500
1000
500

0
2018 2019 2020

13

ACCEPTANCE

ü As with other Islamic contracts, the Mudharabah
contract must be preceded by offer and acceptance.

ü Both the parties, the fund provider and the Mudarib
should be eligible to act as principal and agent
(contracting capacity).

ü The wording of the offer and acceptance must indicate
the purpose of the contract, explicitly or implicitly.

ü There should be no counter offer i.e. the party must
accept of the same conditions as the conditions of the
offer.

ü The contract can be verbal or in writing but in practice
is invariably written.

ü It can be concluded through correspondence or by fax.

14

Profit Sharing Ratio (PSR) should be determined at the
time of contracting. PSR can be adjusted subsequently.
Profit is the amount earned in excess of the amount of
the initial Murabahah capital. No revaluation of capital
is permitted.

No work interference by capital provider (Hanbalis
permit this)

Can be limited to a period.

The entrepreneur should comply with capital provider’s
instructions.

No guarantee of recovery of fund except for betrayal
guarantee (performance bond) or a third party
guarantee.

15

CAPITAL

q Specific amount and type (currency).
q Normally in cash but can be in inventory. In such case,

the historical cost or value of such assets should be
considered as Mudharabah capital. Hanbalis allows non
monetary assets.

q Cannot be in the form of debt as this is not readily

available (even if the debt is owed by the Mudharib).

q Capital must be paid to the Mudharib. The contract can

allow payment by installments.

q Capital provider bears all the loss unless due to trespass

or omission by the Mudharib.

16

q The entrepreneur should comply with shari’ah rules and

any conditions imposed unless these contradict the
Mudharabah contract.

q Distribution Method: According to Maliki it is realised

upon distribution between the two parties.

q Profit can be on a realization or cash basis. (recognition

when distributed or losses deducted from capital or
when declared).

2000
1500
1000
500

0
2018 2019 2020

17

APR MAY
MAR
JAN FEB

18

Transactions/Events DR CR

Recognition of Mudharabah Cash Mudharabah
deposit (liability) Deposit

(Deposit received from Rabbul Mudharabah Cash
Mal/ capital provider) Deposit
Withdrawal of deposit

(Being deposit repaid to Rabbul
Mal/ capital provider)

Provision of Mudharabah Mudharabah Cash
financing to Mudharib Financing

Non-monetary assets provided on Non-monetary Asset
Mudharabah Mudharabah

Assets

Profit received from Mudharib Cash Profit & Loss

Profit disbursed to Rabbul mal Profit & Loss Cash

Loss set off against Rabbul mal Profit & Loss Mudharabah
Payment of Mudharabah capital Cash Financing
to the bank Mudharabah
Financing

19

Mudharabah
Financing

Sudan Islamic Bank executes a Mudharabah contract for

RM1,000,000 with BB constructions on 1 January 2021. The

feasibility study and legal expenses cost the bank RM50,000

and was paid by the Bank. The RM1,000,000 is to given to

BB constructions for their use in the Mudharabah as

follows:

q 1 Januari 2021: RM200,000 cash + RM300,000 (fair

value) of a crane which was used for Ijarah purposes by

the bank in a previous assets with a book value of

RM400,000.

q 1 February 2021: RM200,000 fair value of construction

materials which was left over from terminated Istisna

contract, the carrying value was RM150,000.

q 1 May 2021: Received RM300,000 in cash.

Required: Journal entries in the books of Sudan Islamic Bank

for the above transactions which were executed as

scheduled.

20

Date Description Debit (RM) Credit (RM)
Jan 1 Dr Mudharabah RM200,000
Financing
Non-Monetary RM300,000
Mudharabah Asset
RM100,000
Loss on Crane
RM200,000
Cr Cash RM400,000
Cr Assets on Ijarah

Feb 1 Dr Mudharabah RM200,000
Financing RM150,000

Cr Istisna’ Work in
Progress

Cr Profit and Loss RM50,000

Being transfer of construction materials as capital to
Babul Bahrain constructions at fair value of RM200,000

May 1 Dr Mudharabah RM300,000
Financing

Cr Cash RM300,000
Being payment of last installment of capital

21

22

1

Mr. Munir, a millionaire provides RM 2,224,455.00
to Entrepreneur and agreed on Profit Sharing Ratio
(PSR) of 3 : 2 respectively. How much profit and
loss that will be allocate to both of them if each
period method are used (show your calculation).
Assume the following result of the venture.

Year Profit / (Loss)
1 RM723 330.00
2 RM533 225.00
3 (RM311 000.00)

23

Year Profit / (Loss) Mr. Sudir Entrepreneur

(3/5) (2/5)

1 RM722 330.00 RM723,330.00 x 3/5 RM722,333.00 x 2/5

= RM433,998.00 = RM289,332.00

2 RM533 225.00 RM533,225.00 x 3/5 RM533,225.00 x 2/5

= RM319,935.00 = RM213,290.00

3 (RM311 000.00) (311,000.00) 0
Bear all the loss RM502,622.00

Total RM442,933.00

24

2

Giant Company had invested RM2,500,000 with Ghazzah
Bank based on mudharabah principle which the bank had
promised to give 40% of profit to the company. The bank
then use the money to finance Creative Company based
on four-year mudharabah financing. The profit sharing
ratio that was agreed between the bank and Creative
Company is 5:2 respectively. The profit and loss from the
partnership as disclosed by the partner are as follows:

Year Profit / (Loss)
1 RM80,010
2 (RM43,000)
3 RM124,999
4 (RM34,994)
Determine the profit or loss (show your calculation) that
will be allocated for all parties involved based on:
i. Each period method
ii. End of contract method

25

i) Each period method

Year Profit / Creative Ghazzah Bank Giant
(Loss) Company Company

1 RM80,010 RM80,010 x 2/7 RM80,010 x 5/7 = RM57,150

= RM22,860 *to be shared

RM57,150 x RM57,150 x
0.6 0.4

= RM34,290 = RM22,860

2 (RM43,000) 0 0 (43,000)

Bear all the
loss

3 RM124,999 RM124,999 x RM124,999 x 5/7 = RM89,285
2/7 *to be shared

= RM35,714 RM89,285 x RM89,285 x
0.6 0.4

= RM53,571 = RM35,714

4 (RM34,994) 0 0 (RM34,994)
Bear all the
Total RM58,574 RM87,861
loss

(RM19,420)

26

ii) End of contract method

Year Profit / (Loss) Creative Ghazzah Bank Giant
Company Company

1 80,010 RM127,015 x RM127,015 x 5/7
2/7 = RM90,725
*to be shared
= RM36,290

2 (43,000) RM90,725 x RM90,725 x
3 124,999 0.60 0.40

= RM54,435 = RM36,290

4 (34,994)

Total RM127,015 RM36,290 RM54,435 RM36,290

27

3

Al-Qassam Bank contributed RM4,000,000 for a
four-year mudharabah financing contract at the
profit sharing ratio of 3:1 between the Bank and
Mercy Corporation respectively.

Assume that the venture incurred a loss of
RM150,000 in the first year; realized profit of
RM375,000 in the second year; incurred a loss of
RM250,000 in the third year; and realized profit of
RM350,000 in the fourth year.

Prepare the necessary journal entries to recognize
asset and profit/loss of the above transactions if
the profit of Mudharabah is determined at the end
of each period.

28

Year Name of account Debit (RM) Credit (RM)
Year 0 Dr. Mudharabah Financing 4,000,000
Year 1 4,000,000
Cr. Cash
Year 2
Dr. Profit and Loss 150,000
Year 3 Cr. Mudharabah Financing
150,000
Year 4 (loss in 1st year)

Dr. Cash / Receivable (3/4 x 375,000) 281,250
Cr. Profit and Loss
281, 250
(profit in 2nd year)

Dr. Profit and Loss 250,000
Cr. Mudharabah Financing
250,000
(loss in 3rd year)

Dr. Cash / Receivable (3/4 x 350,000) 262,500
Cr. Profit and Loss
262, 500
(profit in 4th year)

Dr. Cash / Receivable 3,600,000
Cr. Mudharabah Financing 3,600,000

(capital repayment, year 4)

End of each period method

29

4

Ehsan Sdn. Bhd. enter into two-year Mudharabah
contract with an Islamic Bank. The bank contribute
RM85 000 and had agreed profit sharing ratio of
3:2 (Rabbul Mal : Mudharib). In 1st year, the
Mudharabah realized a profit of RM6250. However,
the Mudharabah incurred loss of RM8250 in 2nd
year.

Required:
Journalized all the necessaries transaction and
show the calculation of profit that will be allocated
to Islamic Bank and Ehsan Sdn. Bhd. for both years,
if the profit is determined at:
i. End of each period
ii. End of the contract

30

i) Each period method
i) End of contract method

31

32

5

Bank Mu’min and Azu Accessories Sdn. Bhd. had

entered into 4-year mudharabah contract and agreed

on profit sharing ratio of 3:1 respectively where the

bank provides capital amounting to RM200,000. The

profit and loss as disclosed by the company are as

follows: Year Profit / (Loss)

1 (RM44,000)

2 (RM60,000)

3 RM36,000

4 RM52,000

You are required to prepare the necessary journal entries

to recognize asset and profit/loss of the above transactions,

and show how profit/loss will be allocated between the

Bank and the Mudarib will appear in the respective income

statements at the end of first, second, third and fourth

year, if the profit of Mudharabah is determined :

i) at the end of each period
ii) at the end of the contract

33

i) End of each period method

34

ii) End of the contract method

35

Comparison between
Mudharabah and Musharakah

Investment/Capital Comes from rabbul Comes from all
Right to participate mal partners

Rabbul mal has no All partners
right to participate

Loss sharing Absorbed fully by All partners bear the

Characteristics rabbul mal losses according to
Investment/Capital
Right to participate Mudharabah Mushcaraakpahital contribution
Loss sharing Comes from rabbul mal ratio.Comes from all partners
Rabbul mal has no right to
LiabilLiitaybility participate All partners

Ownership of assets Absorbed fully by rabbul mal All partners bear the losses
according to capital
Ownership of assets
LiLaiabbiliitlyiotfyraobbful rmaalblimbituedl mal Normallycontribution ratio. unlimited

to Normally unlimited
limited to hishis investment
All assets owned by rabbul mal All assets become jointly
owned by all partners
investment according to proportion of their

investment

All assets owned by All assets become

rabbul mal jointly owned by all

partners according to

proportion of their

investment

36 1

2

37

Musharakah is defined as a partnership

between the Islamic bank and its clients
whereby each party contributes to the
capital of partnership in equal or varying
degrees, and whereby each of the parties
becomes an owner of the capital on a
permanent or declining basis and shall
have his due share of profits. However,
losses are shared in proportion to the
contributed capital.

38

CONSTANT MUSHARAKAH

A Musharakah in which the partners’

share in the capital remain constant
throughout the contract.

DIMINISHING MUSHARAKAH

A Musharakah in which the Islamic bank

agrees to transfer shares to the other partner
in the musharakah, until latter becomes the
sole proprietor of the venture.

39

40

1. Musharakah A’yan (equivalent to joint
stock)

2. Musharakah Mufawada (flexible
partnership)

3. Musharakah A’amal (based on work
done jointly)

4. Musharakah Al-Wujooh (reputation
based credit partnership)

41

Musharakah A’yan

u It is a contract between two or more
persons. Each of the parties contributes a
portion of the overall fund and participates
in work. Both parties share in profit or loss
as agreed between them, but equality is not
required either in the contribution to the
fund or in work or in sharing of profit.

42