murabaha-accounting entries.pdf

8/14/2019 Murabaha-Accounting Entries.pdf

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Accounting Treatment

of Murabaha

1. Measurement at acquisition by bank

Historical cost shall be the basis

Measurement of Asset Value

2. Measurement After acquisition

a. Purchase orderer is obliged to fulfill his promise

Historical cost should be used

b. Purchase orderer is NOT obliged to fulfill his promise

The asset value shall be measured at the cash equivalent

value. If there is a decline in the value of asset, a provision

for decline in the asset value shall be created.


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Measurement of Asset Value

3. Discount on asset acquired by the bank

Generally any discount received by the bank from the supplier shall not

be considered as part of revenue but it will reduce the cost of goods by

the amount of discount.

Short term & long term Murabaha receivable shall be recorded at

Murabaha Receivables

the time of contract at their face value.

Murabaha receivable are measured at the end of the end of

financial period at their cash equivalent value i.e. amount due from

the customers at the end of financial period less any provision for

doubtful debts.


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a. On cash (or credit less then the financial period)

Profit Recognition

May be recognized at the time of contracting

b. On credit (lump sum or installment)

a. Proportionate allocation of profits over the period of credit irrespective

of whether cash is received or not. (preferred)

b. As and when the installments are received.

However, in both a & b, the revenue & cost of goods sold shall be

recognized at the time of Sale, subject to the deferral of profit

Deferred profitDeferred profit shall be offset against Murabaha receivables in the

statement of financial position.

If the client accelerates payment of one or more installments prior to the

date specified for such payment, the Islamic bank may adopt one of the

following steps: *

Early Settlement with Deduction of Part of Profit

a) At the time of settlement

The Islamic bank may deduct part of the profit and the deducted

to agreed at the time of settlement. The deducted amount shall be

credited to the Murabaha receivables account and excluded from

the profit recognized in respect of the installment

b) After settlement

The Islamic bank may ask the client to pay the full amount and

thereafter the Islamic bank reimbursed the client with part of the

profit. The amount reimbursed shall be credited to the Murabaha

receivables account and excluded from the profit recognized in

respect of the installment.* subject to the approval of SSB of the bank.


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Insolvency

If it becomes evident that the clients non-payment is due to

insolvency, than the Islamic bank cannot ask to pay additional

amount by way of penalty

Below is the case study for the understanding of Murabaha transactionscarried out in Meezan Bank in various scenarios:

Case Study for Advance Murabaha

.

Purchase price/Cost/Principal 1000

Profit Rate 10%

Tenure 1 Year

Total profit on transaction 100

Sale price (Contract price) 1,100

ate o s ursement to supp er customer anuary ,

Date of Murabaha Contract i.e. Date of Possession January 15,2010

Date of Culmination January 15,2010

Date of Maturity of Murabaha December 31, 2010


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When there is bullet payment of profit and Cost (Principal) at the end of the

period:-

Scenario - 1

supplier by the bank the transaction will be accounted for as follows:

January 01, 2010

Dr Advance against Murabaha 1,000Cr Pay Order / Party Account 1,000

2- On January 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent ofthe bank informs the bank that he has utilized the amount for procurement of goods, the

following entries would be passed:

January 15, 2010

Dr Inventory 1,000Cr Advance against Murabaha 1,000

3-On January 15, 2010, at the culmination of Murabaha i.e. at the time of sale of goods to thecustomers with signing of Murabaha Contract by the bank and the client, the following entrieswould be passed:

Scenario 1 Cont

January 15, 2010Dr Murabaha Financing 1,000Dr Murabaha Profit Receivable 100Cr Inventory 1,000Cr Deferred Murabaha Income 100

4-At the time of Booking of Accrual @ 10% profit rate each month the following entry would bepassed. For instance at the end of January 31, 2010 [(1000 x 10%) x 31 / 365]

January 31, 2010

Dr Deferred Murabaha Income 8.49

Cr Income on Murabaha Financing 8.49

And so on this entry will be passed at the end of EACH month till maturity.


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5-On Maturity of Murabaha transaction i.e. on December 31, 2010 and at the time of receiving of

final payment following entry would be passed:January 01, 2011

Scenario 1 Cont

Dr Party Bank A c 1,100Cr Murabaha Financing 1,000Cr Murabaha Profit Receivable 100

In case Declaration & Murabaha Contract is not received on January 15, 2010and is received on February 15, 2010:

6-At the time of payment to the client for the purchase of goods on behalf of bank or directly to thesupplier by the bank the transaction will be accounted for as follows:

anuary 01, 2010

Dr Advance against Murabaha 1,000

Cr Pay Order / Party Account 1,000

7-On January 15, 2010

No entry would be passed

8- At the end of First Month i.e. January 31, 2010

No entr would be assed for accruals of rofit as Declaration has not

Scenario 1 Cont

been received from the customer.

9- On February 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent ofthe bank informs the bank that he has utilized the amount for procurement of goods, the


February 15, 2010Dr Inventory 1,000

r vance aga ns ura a a ,


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10-On February 15, 2010, at the culmination of Murabaha i.e. at the time of sale of goods to the

customers with signing of Murabaha Contract by the bank and the client, the following entrieswould be passed:

Scenario 1 Cont

February 15, 2010Dr Murabaha Financing 1,000Dr Murabaha Profit Receivable 100Cr Inventory 1,000Cr Deferred Murabaha Income 100

11-At the time of Booking of Accrual @ 10% profit rate each month the following entry would bepassed. In this case the accrual would be for TWO months and would be passed on February28, 2009 in the ollowin manner:[(1000 x 10%) x (31+28) / 365]

February 28, 2010

Dr Deferred Murabaha Income 16.164Cr Income on Murabaha Financing 16.164

NOTE: In case the Murabaha declaration is NOT received on the due date, NO Entrywould be passed until the Murabaha Declaration is received.

When there is a bullet payment of Cost (Principal) at the end and profit ispayable on monthly basis:

Scenario 2

1-At the time of payment to the client for the purchase of goods on behalf of bank or directly to the

supplier by the bank the transaction will be accounted for as follows:

January 01, 2010Dr Advance against Murabaha 1,000

Cr Pay Order / Party Account 1,000

2-On January 15, 2010, at the time of signing of Declarationi.e. customer acting as an agent ofthe bank informs the bank that he has utilized the amount for procurement of goods, the

following entries would be passed:January 15, 2010Dr Inventory 1,000Cr Advance against Murabaha 1,000


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3- On January 15, 2010, at the time of culmination of Murabaha i.e. at the time of sale of goods to

the customers with signing of Murabaha Contractby the bank and the client, thefollowing entries would be passed:

Scenario 2 Cont


4-At the time of Booking of Accrual @ 10% profit rate EACHmonth the following entry would

be passed. For instance at the end of January 2010

[(1000 x 10%) x 31 / 365]

January 31, 2010

Dr Deferred Murabaha Income 8.49 Cr Income on Murabaha Financing 8.49


5- At the time of receiving of Profit amount at the end of EACHmonth the following entry wouldbe passed:

January 31, 2010

Scenario 2 Cont

r arty an c 8.49 Cr Murabaha Profit Receivable 8.49

6-At the maturity of the Murabaha period the last months remaining Murabaha

income(December 2010) will be booked as per the following entry:

December 31, 2010Dr Deferred Murabaha Income 8.49 Cr Income on Murabaha Financin 8.49

7-Now at the end of the period the amount received from the client includes the whole amount ofprincipal and last months profit, so the entry would be as follows:

January 01, 2011Dr Party A/c / Bank 1,008.49 Cr Murabaha Financing 1,000Cr Murabaha Profit Receivable 8.49


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When there is a bullet payment of profit at the end of Murabaha period andCost (Principal) is payable on monthly basis:

Scenario 3

1-At the time of payment to the client for the purchase of goods on behalf of bank or directly to thesupplier by the bank the transaction will be accounted for as follows:

January 01, 2010Dr Advance against Murabaha 1,000Cr Pay Order / Party Account 1,000

2- On January 15, 2010, at the time of signing of Declarationi.e. customer acting as an agentof the bank informs the bank that he has utilized the amount for procurement of goods, the

January 15, 2010

Dr Inventory 1,000Cr Advance against Murabaha 1,000

3-At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signingof Murabaha Contractby the bank and the client on January 15, 2010 following entrieswould be passed:

Scenario 3 Cont


4-At the time of Booking of Accrual @ 10% profit rate EACH month the following entry wouldbe passed. For instance at the end of January 2010[(1000 x 10%) x 31 / 365]

January 31, 2010Dr Deferred Murabaha Income 8.49 Cr Income on Murabaha Financing 8.49



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5-As the principal is payable EVERYmonth the entry passed would be passed when installment isreceived from the customer:

Scenario 3 Cont

[1000 / 12 = 83.33]

January 17, 2011 (On any date on which the installment is received)Dr Party A/c / Bank 83.33Cr Murabaha Financing 83.33

6-As the amount of Profit is payable at the end of the period, the entry would be as follows:

January 01, 2011Dr Party A/c / Bank 100Cr Murabaha Profit Receivable 100

Below is the case study for the understanding of Credit Murabaha transactions carried out in Meezan Bank in various scenarios:

Case Study for Credit Murabaha

.

Murabaha Purchase price/Cost/Principal 1000

Supplier Credit available to customer/Client 2-Months (60 Days)

Tenure for Financing 1 Month (30 Days)

Total profit on transaction 100

Contract Price of Goods Sold 1,100

ate o ec arat on oo s ece v ng ate - pr-

Date of Disbursement/ Payment to the Client 30-May-10

Date of Payment from Customer (Cost+Profit) 29-June-10


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1- On April 01, 2010, at the time of signing of Declaration i.e. customer acting as an agent of thebank informs the bank that he has utilized the amount for procurement of goods, the followingentries would be assed:

Credit Murabaha- Scenario

April 01, 2010Dr Inventory against Credit Murabaha (NON FUNDED) 1,000Cr Payable to Supplier-Credit Murabaha (NON FUNDED) 1,000

(Off Balance Sheet Accounting Entry)

2-At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signing ofMurabaha Contract by the bank and the client on April 01, 2010 following entries would be

asse

April 01, 2010Dr Credit Murabaha Financing (NON FUNDED) 1,000Cr Inventory against Credit Murabaha (NON FUNDED 1,000

(Off Balance Sheet Accounting Entry)

3-At the time of payment to the client for the purchase of goods on behalf of bank or directly to thesu lier b the bank the transaction will be accounted or as ollows:


May 30, 2010Dr Payable to Supplier-Credit Murabaha (NON FUNDED) 1,000Cr Credit Murabaha- Financing (NON FUNDED) 1,000

(Reversal of Off balance Sheet Accounting entry)

Dr Murabaha- Financing (FUNDED) 1,000Dr Profit Receivable on Murabaha 100Cr Part account (FUNDED 1,000Cr Deferred profit on Murabaha 100

(Recording of On Balance sheet Financings)


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4-At the end of First Month i.e. May 31, 2010


Accrual of Profit for the lapse period (from Disbursement till date)Dr Deferred profit on Murabaha 3.33 (100/30*1)Cr Income on Murabaha 3.33

5- Disclosure at Balance Sheet on May 31, 2010

Murabaha 1,100

Profit receivable (shown other asset) (100 )Murabaha-net 1,000

6-At the maturity of the Murabaha period the Accrual of Profit for the lapse period (from June 1,2010 till maturity i.e. June 29, 2010) will be booked


June 29, 2010

Dr Deferred profit on Murabaha 96.67

Cr Income on Murabaha 96.67

7-Now at the end of the period the amount received from the client includes the whole amount ofprincipal and last months profit, so the entry would be as follows:

June 29, 2010

Dr Party Bank A/c 1,100

Cr Murabaha 1,000

Cr Profit receivable on Murabaha 100


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FE25 Murabaha

All the procedure would remain the same, as is mentioned abovein various cases, except for the fact that the amount would be

in foreign currency.

Below is the case study for the understanding of IERS transactionscarried out in Meezan Bank in various scenarios:

For IERS the example in the First case would remains the same

Islamic Export Refinance Scheme (IERS)

except for the following:

Example Amount in Rs./%

Profit Rate 10%

Tenure 180 Days

Profit on Transaction 49.31/-

Sale Price (Contract Price) 1,49.31/-

Date of Disbursement to client/ Payment to the Supplier January-01-2010

Date of Culmination (Signing of Murabaha Contract) January-15-2010

Date of Maturity of Murabaha June-29-2010


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1-At the time of payment to the client for the purchase of goods on behalf of bank or directly to the


January 01, 2010Dr Advance against Murabaha (458) 1,000Cr Pay Order / Party Account 1,000

2- On January 15, 2010, at the time of signing of Declarationi.e. customer acting as an agentof the bank informs the bank that he has utilized the amount for procurement of goods, theollowin entries would be assed:

January 15, 2010

Dr Inventory against ERF 1,000Cr Advance against Murabaha 1,000

3-At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with signingof Murabaha Contractby the bank and the client on January 15, 2009 following entrieswould be passed.


a a ,Dr ERF From SBP (Part-I or Part II) 1,000Dr Murabaha Profit Receivable ERF 49.31Cr Inventory against ERF 1,000Cr Deferred Murabaha Income ERF 49.31

4-At the time of Booking of Accrual @ 10% profit rate EACHmonth the following entry wouldbe passed. For instance at the end of January 2010

[(1000 x 10%) x 31 / 365]

January 31, 2010Dr Deferred Murabaha Income ERF 8.21Cr Income from ERF 8.21



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5-At the time of receiving of Profit amount at the end of EACHQuarter the following entry would

be passed:March 31, 2009


r arty an c 24.65

Cr Murabaha Profit Receivable ERF 24.65

6-At the maturity of the Murabaha period the remaining Murabaha income(June 29, 2009)will be booked as per the following entry:

June 29, 2009

Dr Deferred Murabaha Income ERF 8.21

Cr Income from ERF 8.21

7-Now at the end of the period the amount received from the client includes the whole amount of

principal and last months profit, so the entry would be as follows:January 01, 2007

Dr Party A/c / Bank 1,024.65

Cr ERF From SBP (Part-I or Part II) 1,000

Cr Murabaha Profit Receivable ERF 24.65

Below is the case study for the understanding of FIM (SPOT)transactions carried out in Meezan Bank in various scenarios:

Financing of Imported Merchandize (FIM)-SPOT

xamp e moun n s.

Murabaha Price 4,000,000

Profit Rate 15%

Tenure 90 Days

Date of Disbursement to client/ Payment to the Supplier January-01-2010

Date of Declaration (Goods Receiving Date) January-15-2010

Date of First Partial culmination of 1 Million

i.e. Date of signing of partial Murabaha Contract

February-15-2010

Date of First Partial culmination of 3 Million

i.e. Date of signing of partial Murabaha Contract

March-31-2010

Date of Maturity of Murabaha March-31-2010


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1-At the time of payment to the client for the purchase of goods on behalf of bank or directly to thesu lier b the bank the transaction will be accounted or as ollows:


January 01, 2010Dr Advance against Murabaha 4,000,000Cr Pay Order / Party Account 4,000,000

2- On January 15, 2010, at the time of signing of Declaration i.e. customer acting as an agent of thebank informs the bank that he has utilized the amount for procurement of goods, the


January 15, 2010Dr Inventory 1,000

Cr Advance against Murabaha 1,000

3-At the end of First Month i.e. January 31, 2010


No entry would be passed for accruals of profit, as Murabaha Contracthas not been received from the customer.

4-At the First Partial Culmination of Murabaha i.e. at the time of sale of goods worth PKR 1Millionto the customers with signing of Murabaha Contract by the bank and the client on

February 15, 2010 following entries would be passed.

February 15, 2010

Dr Party Bank A/c 1,024,246.6 Cr Inventory 1,000,000Cr Income on Murabaha Financing 24,246.6


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5-At the end of Second Month i.e. February 28, 2010


No entry would be passed for accruals of profit

6-At the Second Partial Culmination of Murabaha i.e. at the time of sale of goods worth PKR 3Millionto the customers with signing of Murabaha Contract by the bank and the client on

March 31, 2010 following entries would be passed.

March 31, 2010

, ,

Cr Inventory 3,000,000

Cr Income on Murabaha Financing 110,956

Thank You

murabaha-accounting entries.pdf

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