Soldier of Allah 

8. Calculating Zakah on the Items of Financial Lists
 

Calculating Zakah on Fixed Assets
Calculating Zakah on Works Under Construction
Calculating Zakah on Long-Term Investments
Calculating Zakah on Current Assets
Calculating Zakah on Liabilities
Calculating Zakah on Allocations
Calculating Zakah on Ownership Rights
Calculating Zakah on the Items of Revenue Lists


Calculating Zakah on Fixed Assets


These are long-term assets known in accounting as "fixed assets" e.g. lands, buildings, furniture and cars. They are not meant for resale, and can be divided into:

- Fixed assets that are meant for use and operation (durable goods).

- Fixed assets that bring in revenue.

The following is s definition and evaluation of fixed assets according to standard accounting practices, and the evaluation and legal judgment pertaining to each fixed assets item, showing its degree of accountability with regard to Zakah:

1. Material fixed assets meant for use and operation (durable goods)

* Standard definition and evaluation:

Assets, such as real estate, machines, cars, and furniture, are owned and meant for use only, not for resale to gain a direct profit. These are to be evaluated on the original cost with depreciation.

* Evaluation and legal judgment:

No Zakah is paid on material fixed assets for use and operation. Also, the value of its depreciation is not to to be subtracted as commitments from the assets that Zakah is paid on.

2. Material fixed assets that accrue revenue

* Standard accounting definition and evaluation:
Assets that are possessed to accrue revenue such as real estate, and rented cars. These are to be evaluated on the basis of the original cost after subtracting its depreciation.

* Evaluation and legal judgment:

No Zakah is paid on these assets. Their net revenue is to be added to other assets liable to Zakah at a rate of 2.5%. This is the ruling chosen by the Islamic Jurisprudence Academy in Jeddah.

3. Intellectual fixed assets meant for use and operating

* Standard accounting definition and evaluation:

Intellectual useful rights that aid in the operation of different activities and are not meant for revenue.
They are evaluated on the basis of their cost which represents the sum paid for their attainment in addition to other expenses deducted from their consumption.

*Evaluation and legal judgment:

No Zakah is paid on these assets because they are connected with the fixed assets for their use with the aim of providing aid to the operation process.

4. The intellectual fixed assets the accrue revenue

* Standard accounting definition and evaluation:

These are non-material rights meant for accruing revenue or income such as copyrights and patents that are utilized for a determined period against a financial return.

* Evaluation and legal judgment:
No Zakah is payable on these assets. Their net revenue is added to the amounts upon which Zakah is due and 2.5% rate is to be taken thereof.

Points on fixed assets:

1 . Depreciation of fixed assets represents the reduction in value due to an object's operation. It is to be calculated annually according to different depreciation methods.

The legal judgment states that depreciation is not to be considered as part of the commitment subtracted from assets liable to Zakah, for such assets are not included in the amounts upon which Zakah is due.

2 . Interest on loans to finance fixed assets: Some accountants are of the view that this should be added to the cost of these assets. This is referred to as Interest Capitalization.

Legal Judgment: This Interest is seen as pure usury. If already paid, they would be excluded from the assets liable to Zakah. But, if they are not paid, there is no need to subtract them from the assets liable to Zakah, for this interest is not considered as legally payable debt, even if in accordance with civil law.

Funds designated to finance the maintenance and preserving of fixed assets obtained for use.
The legal judgment: this is not to be subtracted from the assets upon which Zakah is liable for it has not already been spent.



Calculating Zakah on Works Under Construction


Standard accounting definition and evaluation:

These are in progress construction projects, such as the construction of buildings and reclamation of lands. These may be converted, after completion, to fixed or interchangeable assets according to the goals of the project. These are evaluated on the basis of the construction costs until the date of preparing the budget. This may include the price of the land, costs for of the architect drawings, licenses, raw materials and labor. These are not considered as consumed until the work is done and the property is ready for use.

Evaluation and legal judgment:

If the intent of the projects under construction is to be used in the operating process, i.e. they become possession assets and no Zakah will be payable for them. However, if they were meant to be trade inventory, they will be evaluated on the basis of market value of the lands and raw materials and they are added to the assets that Zakah is payable for.



Calculating Zakah on Long-Term Investments


These are funds invested in various assets. Establishments make these investments when there is a surplus in their funds after financing basic activities. The goal behind these investments is either to earn revenue or just to enter into trade.

Long-term investments include the following:

1. Investment in bank notes.

2. Investment in real estates.

Evaluation and legal judgment of these investments depends on their types.

Investment in shares

* Standard accounting definition and evaluation:

The share is a portion of the capital of a joint-stock company. The share- holder is considered to be a partner in the company's net assets. The share has many values, including:

- Basic value:

This is the value that is determined at its first issue.

- Market value:

This is the value that is determined on the basis of supply and demand within the banknote market. It is evaluated on the basis of the lesser of the two; the cost or the market, along with determining a recess assignment in the case of a share's decline if market value was less than the cost value.

* Evaluation and legal judgment:

Shares are evaluated according to market value for the purposes of calculating Zakah. If the dealings of the company that released or issued the shares were lawful, taking possession of these shares becomes lawful. But if its activities were unlawful, it becomes forbidden to possess these shares.

As for Zakah: If the company that released the shares paid Zakah, the share-holder is not asked to pay it again. But, if it did not, the share- holder is asked to pay it according to the purpose of possessing such shares.

1. Investments in shares meant for earning revenue

* Standard accounting definition and evaluation:

These are investments in the shares possessed for growing and bringing in revenue. These are termed 'long term investments'. These are intermediate between fixed and interchangeable assets. They are evaluated on the basis of the lesser of the cost price or market value. Along with determining a recess provision in case of a decline in market value was less than the cost value.

* Evaluation and legal judgment:

a . If the share-holder is able to know the portion of Zakah due upon the share as part of the amounts possessed by the company upon which Zakah is due, he is asked to pay Zakah for that portion at the rate of 2.5%.
b. If he cannot know, he must add the revenues gained therefrom to the rest of his wealth upon which Zakah is due and calculate the Zakah due on the basis of the whole amount at the rate of 2.5%.

Note:

Evaluating for the purposes of Zakah is based on market value; thus, the recess provision in case of banknote' price decline is not to be subtracted from the amounts upon which Zakah is payable or due.

2. Investment in shares meant for trade

* Standard accounting definition and evaluation:

These are investments in shares that are bought for the purpose of dealing in trade, i.e. reselling them in order to make a profit. These are evaluated on the basis of the lesser of the cost or the market, along with determining a recess provision if market value was less than the cost value.

* Evaluation and legal judgment:

Investments in shares meant for trade are evaluated according to the market price upon the completion of the year and added to other assets or amounts upon which Zakah is due.

3. Investments in the shares of subsidiary companies (aimed at bringing in revenue)

* Standard accounting definition and evaluation:

A subsidiary company is one in which the parent company possesses, directly or indirectly, more than 50% of the shares that have the right to vote. It is evaluated on the basis of the costs or the market, whichever is less, along with determining a recess provision if market value was less than the cost value.

* Evaluation and legal judgment:

Zakah for a subsidiary company is independently calculated. Then, the parent company's share thereof is determined on the basis of the ratio of the shares it possesses. The profit is added to the amounts upon which Zakah is due, by the parent company. If subsidiary company did not pay Zakah on its own part.

4. Investments in the shares of sister companies

* Standard accounting definition and evaluation:

Sister companies differ from subsidiary's. Investment in the shares of these companies is deemed a long-term investment. It is evaluated on the basis of costs or the market, whichever is less. Along with deducting a recess provision if the market value was less than the cost value.

* Evaluation and legal judgment:

We apply the same judgment as that related to investment in the shares with the purpose of earning revenue. The recess provision related to their prices is not to be subtracted from the amounts upon which Zakah is due.

5. Investment in the shares of a purchased company

* Standard accounting definition and evaluation:

Sometimes it is permitted for a company to purchase its own shares from the market of bank note exchange but with certain restrictions and legal terms. This is done for trading and not for earning revenue, as the company will resell them when it needs funds or cash. These shares are evaluated on the basis of the purchase price.

* Evaluation and legal judgment:

These are evaluated on the basis of the market value upon completion of the year. They are to be added to other assets or amounts on which Zakah is payable.

6. Investment in securities

* Standard accounting definition and evaluation:

Securities are monetary tools or means issued to a holder or bearer. They represent a debt and debtor relationship and also bear interest that is payable on determined dates. The loan-taker commits himself to pay the interest in addition to repaying the original amount (value of the security) on the prescribed repayment date. Securities are evaluated at cost price considering the deducted or added amounts. If they were exchanged and handled in the market, the lesser price will be applicable. A recess provision related to their prices is to be determined if the market value was less than the cost value.

* Evaluation and legal judgment:

Securities are to be evaluated on the basis of their original value, i.e. the amount of security. According to Islamic Shari`ah, dealing in securities is illegal because it involves interest. However, the holder must pay Zakah for the cost of the securities by adding them to the assets or amounts upon which Zakah is due. The interest earned must be spent in charity except in constructing mosques or printing copies of the Holy Qur'an. Spending such interest will return no reward to the holder; it is just a means to get rid of the ill-gained money. This interest must not be included in the amounts upon which Zakah is payable.

7. Investment in treasury bills

* Standard accounting definition and evaluation:

Some governments take loan from the local market by issuing bonds with interest. These 'treasury bonds' do not differ from normal bonds. Treasury bonds are evaluated on the basis of their cost price with the addition of the commitments from the date of purchase.

* Evaluation and legal judgment:

Treasury bonds are evaluated on the basis of the original value at which they were issued, i.e. the amount of the bond. It is not lawful to deal in treasury bonds as they earn interest. Legal judgments pertaining to all kinds of bonds can be applied to treasury bonds.

8. Investment in real estate intended to earn revenue

* Standard accounting definition and evaluation:

This represents the amounts invested in land and buildings of various kinds. They are possessed only for earning revenue.
They are evaluated on the basis of the accounting principle of the lesser of the two: the cost or the market value.

* Evaluation and legal judgment:

No Zakah is payable on the original value of real estate. Its net revenue is to be added to the amount counted for Zakah. Zakah is then taken from the whole amount at the rate of 2.5%.

9. Investment in real estate meant for trade

* Standard accounting definition and evaluation:

This form of real estate includes lands and buildings of various kinds that are exploited in trade.
They are evaluated on the basis of the accounting principle of the lesser of the two: the cost or the market value.

* Evaluation and legal judgment:

They are evaluated on the basis of their market value and added to the present amounts liable to Zakah.



Calculating Zakah on Current Assets


Current assets represent those owned for exploitation in trade; to be resold in order to make a profit, and not for earning revenue as is the case with fixed assets (durable goods).

The most important items of the current assets are the following: Merchandise stock (end-term goods, accounts receivable, notes receivable, insurance, pledges, payments in advance on contracts, amounts paid in advance, expenditures paid in advance, receivable profits, deposits, accounts in banks and cash in a monetary fund).

We are going to deal with the standard accounting definition and evaluation as well as the legal judgment and evaluation of these items from the prospective of Zakah.

1. Finished goods

* Standard accounting definition and evaluation:

Finished goods are goods that are prepared for selling by a firm or company. Besides material goods, there are also non-material goods which take the same accounting evaluation.

Finished goods are evaluated on the basis of the cost or market price, the lesser of the two. A provision is to be made to meet the decline in the value of old items or slow moving items. Another provision is to be made in anticipation of the reduction of the market price less than the cost price. This is called a provision for the decline in price of goods.

* Evaluation and legal judgment:

Finished goods are evaluated on the basis of the market value. This is only for goods that are bought for resale. The wholesale price will be considered in calculating Zakah for both the wholesaler and retailer. According to the Fatwas issued by the 1st Symposium on the Contemporary Questions of Zakah (1409 A.H.\1994 A.D.), the full manufactured goods bought for resale are to be included in the inventory liable to Zakah. As for the goods made by the selling establishment, these are to be evaluated on the basis of the market cost of the raw materials and the added substances that do not intervene with others, irrespective of the above-mentioned provisions. However, if the evaluation is made on the basis of the cost price and is lower than the market value, the provision for the decline in goods' prices will be subtracted from the assets liable to Zakah.
The non-material rights meant for trade are to be evaluated on the same grounds as material goods and receive the same legal judgment.

2. Goods in process (unfinished goods)

* Standard accounting definition and evaluation:

Goods in process are goods which are not fully manufactured yet and must still pass through some manufacturing stages. The goods in process are evaluated on the basis of the total cost by the end of the fiscal year that includes the cost of the utilized materials, the spent wages and salaries, and the direct or indirect manufacturing expenditures, according to the method of total costing.

* Evaluation and legal judgment:

The goods in process are evaluated on the basis of the market value of the raw materials and the additional component substances. Goods in process are to be included in the assets liable to Zakah.

3. Raw materials

* Standard accounting definition and evaluation:

Raw materials are the unprocessed natural product used in manufacture. Raw materials are to be evaluated on the basis of their cost price, plus all other expenditure including freight.

* Evaluation and legal judgment:

Raw materials are of two kinds:

First: Basic raw materials: which are to be evaluated on the basis of the market value and added to all other assets liable to Zakah.
Second: Consumables: such as detergents and packaging, which are not included in the assets liable to Zakah.

4. Spare parts of the fixed assets

* Standard accounting definition and evaluation:

Spare parts of the fixed assets represent the stored spare parts for machines, equipment and the like that are used in the production operations and not for dealing in trade. Such kind of spare parts may be regarded as part of the fixed assets or an independent item along with the rest of the goods. They are evaluated on the basis of the cost price after deducting a provision for the wearing out of spare-parts.

* Evaluation and legal judgment:

Such kind of spare parts are considered as complementary to the fixed assets (durable goods) and, thus, are not liable to Zakah.

5. Commercial spare parts

* Standard accounting definition and evaluation:

Commercial spare parts represent the stock of spare parts of different kinds meant for trade. Commercial spare parts are treated like commercial commodities in terms of Zakah.

*Evaluation and legal judgment:

Commercial spare parts are evaluated on the basis of the market value and are to be added to the assets liable to Zakah.

6. Goods in transit

* Standard accounting definition and evaluation:

Goods in transit stand for the goods that have been bought and their price has been paid to the supplier but they still are on the way and have not reached the warehouses of the establishment even after the end of the fiscal year. Goods in transit are to be evaluated on the basis of their real cost plus other related expenditures.

* Evaluation and legal judgment:

These are evaluated on the basis of the market value of the goods in the place where they are at the time of evaluation. They are included in the Zakah assets. If there are goods bought through documented credit, the value of the goods would be the same as that of the credit before repaying it. They also are included in the assets liable to Zakah.

7. Goods in charge of others

* Standard accounting definition and evaluation:

These are goods in the hand of agents that are to be sold on behalf of the owner. Such kind of goods are to be evaluated on the basis of the cost price.

* Evaluation and legal judgment:

These goods are evaluated on the basis of their market value in the place where they are. The are included in the assets liable to Zakah.

8. Accounts receivable

* Standard accounting definition and evaluation:

The accounts receivable are the amounts owed by clients or customers in return for goods, dealings, services, etc. This item is evaluated on the basis of the net amount of the recoverable debts, with a provision for doubtful debts.

* Evaluation and legal judgment:

Debts are divided into three kinds:

a . Recoverable debts, whose amount are to be added to all the assets liable to Zakah.

b . Irrecoverable debts, whose amounts will not be added to all the assets liable to Zakah. Zakah will be payable on such debts at the time of repayment for one year only.

c . Bad debts: which will not be liable to Zakah.

As for the provision assigned for the doubtful debts, it is to be deducted from the Zakah assets if the doubtful debt was wholly included in the Zakah assets. But, if it was not included it will not be subtracted from the Zakah assets.

10. Notes receivable

* Standard accounting definition and evaluation:

Notes receivable are the commercial papers owned by an establishment, whose date of maturity has not come yet, such as bills, permits, etc. The notes receivable are to be evaluated on the basis of the current value.

* Evaluation and legal judgment:

Notes receivable are to be evaluated on the basis of the original value of the notes. If the notes represents a loan with interest, no interest will be added thereto. But, if it is a price of a commodity that is sold on credit, the increase in the price in return for the sale on credit is deemed as part of the price itself and it is dealt with just as the postponed debts and is added to the Zakah assets.

10. Guarantees

* Standard accounting definition and evaluation:

Guarantees represent the sums of money paid by an establishment to assure its commitments to the fulfillment of certain tasks as stipulated in the contract signed by the contracting parties. The guarantees are to be evaluated on the basis of their value in the account book.

* Evaluation and legal judgment:

Such guarantees are considered as a suspended ownership whose realization is not possible except after the fulfillment of the promises and commitments linked to them. Guarantees are not liable to Zakah except after their repayment. Zakah will be payable on guarantees upon the time of repayment for one year only. Therefore, guarantees will not be considered as part of the assets liable to Zakah except in the year of repayment.

11. Prepayments

* Standard accounting definition and evaluation:
Prepayments represent the amounts paid to clients, contractors, handicraftsman, etc. to start up projects. Prepayments are evaluated on the basis of the face value.

* Evaluation and legal judgment:

Prepayments will not be included in the total sums liable to Zakah, as they are not considered a possession of the establishment that paid them.

12. Expenditures paid in advance

* Standard accounting definition and evaluation:

Expenditure paid in advance represent the sums of money paid in advance during the current fiscal period in return for certain services or the like that belong to other fiscal periods to come, such as rent and insurance paid in advance. Expenditures paid in advance are to be evaluated on the basis of their face value.

* Evaluation and legal judgment:

These amounts of money are no longer in the company's possession and they have been bound by some kind of services which will be available for the company within the forthcoming years. Besides, turning them into cash money is difficult. Therefore, expenditures paid in advance will not be included in the total sum liable to Zakah.

13. Accrued revenues

* Standard accounting definition and evaluation:

These are revenues that belong to the current fiscal year and have not been submitted until after the date of the fiscal year end, such as the due incoming investment and the due rent. These are evaluated on the basis of their cash value in the account book.

* Evaluation and legal judgment:

Mature revenues are considered as debts and take the same judgments in the Islamic Shari`ah. If they are recoverable, they will be added to all the assets liable to Zakah. However, if they are irrecoverable, there will be no Zakah payable on them unless after payment.

14. Credits

* Standard accounting definition and evaluation:

Credits here stand for the amounts of money paid to banks for importing goods, fixed assets, etc.
They are evaluated on the basis of the face value that actually represents the payments.

* Evaluation and legal judgment:

Such credits are evaluated on the basis of the actually paid portion of the documented credit value, and will be included in the Zakah assets.

15. Documented credits for financing fixed assets meant for use or gaining incomes or revenues

* Standard accounting definition and evaluation:

Documented credits here stand for the amounts paid to banks to import goods or fixed assets or the like.
They are evaluated on the basis of the recorded value that actually represents the payments.

* Evaluation and legal judgment:

These are evaluated on the basis of what has been already paid as part of the documented credit. They are not subject to Zakah.

16. Letter of credit coverage

* Standard accounting definition and evaluation:

The letter of credit coverage represents the amounts of money paid to banks as either a complete or partial cover for a credit letter that is submitted to given authorities to make the bank offer guarantees that the company or the establishment will abide with their commitments regarding carrying out a certain job. In case the company or the establishment does not abide by their commitments, the value of that letter goes to these previously mentioned authorities.

* Evaluation and legal judgment:

The credit letter is evaluated on the basis of what has already been paid. It is not subject to Zakah for it is bound to a certain work that has not yet been finished. When the value of the letter is repaid, it will be included in the assets liable to Zakah.

17. Cash money in banks

* Standard accounting definition and evaluation:

These are the amounts of money kept in banks either in the form of checking accounts at the disposal of the owner, term investment accounts, etc. Bank deposits are evaluated on the basis of the value of the account book after checking them with the statement of accounts submitted by the banks and other required accounting settlements.

* Evaluation and legal judgment:

These are to be included in the assets liable to Zakah assets. In case these deposits contain interest, the interest should be disposed of by spending it in charitable activities other than building mosques and printing copies of the Holy Qur'an. Bank deposits that accrue lawful profits will be added to the original amounts and the total will be included in the sums liable to Zakah.

18. Tender on hand

* Standard accounting definition and evaluation:

Tender on hand stands for the tender reserved by the establishment or the company in the form of gold, silver, coins and banknote. These are evaluated on the basis of their monetary value at the end of the fiscal year.

* Evaluation and legal judgment:

Tender on hand is evaluated on the basis of its current monetary value at the completion of the year and is added to assets liable to Zakah.

19. Prepaid expenditures

* Standard accounting definition and evaluation:

Prepaid expenditure stand for the expenses paid by the establishment, whose benefit will be available in several years to come, such as expenses for advertisement and the pre-operating period. It is a norm that the consumption of these runs through a period ranging from 3 to 5 years. They are evaluated on the basis of the cost after subtracting the amortization.

* Evaluation and legal judgment:

No Zakah is payable on prepaid expenditure for they are connected to the operation and use processes. Also, their consumption provision shall not be subtracted from the assets liable to Zakah.



Calculating Zakah on Liabilities


These are the liabilities of Companies or Establishments due to others. They include long and short term loans, creditors, notes payable, bank accounts (overdrafts), mature expenses, prepaid revenues, due taxes, prepaid guarantees, dividends payable and the like.

1. Long-term liabilities

Standard accounting definition and evaluation:

These represent liabilities on the Establishment or the Company's part to others whose payment date is not less than a fiscal year, such as the long term loans, documents and notes payable. They are evaluated on the basis of the face value, which may include interest if it has not been paid yet. These liabilities are divided among the ownership rights and the exchanged commitments.

Evaluation and legal judgment:

Generally, liabilities are evaluated on the basis of the face value. The legal judgment differs according to the ways these liabilities are used. This goes as follows:

a . If the due long-term liabilities or the due installment thereof were used to finance goods or any of the items of the current assets, all these are to be subtracted from the assets liable to Zakah in case the Establishment or the Company does not have surplus fixed Zakah assets exceeding their basic needs in order to meet these commitments.

b . If the fixed commitments are used to finance fixed assets, the due installment will be subtracted from the Zakah assets. While it will not be subtracted if its repayment date is not due until after the end of the fiscal year.
In all cases, the due installment of these commitments is subtracted from the Zakah assets.

2.Short-term liabilities

Standard accounting definition and evaluation:

These are the due commitments that must be repaid in a short time, usually not more than a year, such as creditors and notes payable, and the like.

1. Creditors

Standard accounting definition and evaluation:

These are the due commitments payable to the suppliers in a short time, usually not more than a year. The basis of credit in most cases stems from buying the goods and the requirements of operation and production. The creditors are evaluated on the basis of the face value by the end of the fiscal year.

Evaluation and legal judgment:

Creditors are evaluated on the basis of the face value of the credit. These are deemed as part of the due short term commitments that are subtracted from the assets liable to Zakah.

2. Notes payable

Standard accounting definition and evaluation:


Notes payable stem from either bills or license documents, and they represent liabilities to the suppliers who provide the Establishment with goods. These papers usually become payable in a short period not more than a year. The notes payable are evaluated on the basis of the face value at the end of the fiscal year.

Evaluation and legal judgment:

Notes payable are evaluated on the basis of their face value as stated on the notes. They are regarded as short term liabilities that are subtracted from Zakah assets. If they contain a late interest penalty, it will not be subtracted. According to Islam, it is not deemed a sound, rightful and payable debt.

3. Loans and overdraft accounts at Banks and Lending Institutes

Standard accounting definition and evaluation:

These are amounts of money taken as a loan by an Establishment or Company from banks or lending institutions, and are payable in one year or less. Loans and the current credits are evaluated on the basis of their face value at the end of the fiscal year.

Evaluation and legal judgment:

The short term commitments due are evaluated on the basis of their face value and are subtracted from the assets liable to Zakah. If they were to contain banking interests, this would be subtracted. According to Islam, such debts are not deemed sound, rightful and payable debts.

4. The expenses due

Standard accounting definition and evaluation:

These are the expenses that pertain to present fiscal period whose pay back is expected to take place in the next fiscal year. These expenses due are evaluated on the basis of their face value at the end of the fiscal year.

Evaluation and legal judgment:

Expenses due are evaluated on the basis of their face value and are subtracted from the assets liable to Zakah for they are regarded as a kind of short term commitments due.

5. The revenues received in advance

Standard accounting definition and evaluation:

These revenues are amounts of money already received in the present fiscal period but belong to the next or forthcoming fiscal period. They are evaluated on the basis of their face value, for they are regarded as commitments due upon the Establishment or the Company to others in return for exchange contracts for manufactured goods or services that will be available later on.

These revenues are evaluated on the basis of their face value without any increase or decrease. Its legal judgment differs in accordance with the prescribed dates as follows:

a. If the revenues received in advance are part of the price of goods that have not yet been delivered (and these goods were not included in Zakah assets) this revenue would not be subtracted. But if the goods were included in the Zakah assets, this revenue would be subtracted.

b. If the revenues received in advance are part of payment for services that have not been delivered to others, it would be regarded as a debt due to others. Hence, it would be subtracted from the assets liable to Zakah. This revenue is not completely owned as it is possible to break this service agreement for certain reasons.

6. Dues related to others

Standard accounting definition and evaluation:


These are amounts of money due, such as payments to tax department and social insurance and others due to various requirements. Thus, they are regarded as commitments that must be paid. These are evaluated on the basis of their face value and any amounts in the form of interest or late penalties interest may be added thereto.

Evaluation and legal judgment:

These amounts are evaluated on the basis of their face value without adding late penalties thereto if there were any. Also, they are regarded as commitments due that are subtracted from the assets liable to Zakah.

7. Proposed dividend distributions

Standard accounting definition and evaluation:

These are monetary distributions that have been agreed upon by the Company's board of directors on a given date, but have not yet been seconded by the general meeting of shareholders in order to execute the distribution process. These are evaluated in accordance with the amounts of money stated in the board of directors' proposal. In addition, they are stated in the budget under the heading of 'proposed annual profits'.

Evaluation and legal judgment:

These dividends are evaluated on the basis of their face value as stated in the profit distribution statement. They are not subtracted from the Company's assets liable to Zakah, because shareholders did not approve them. Zakah would not then be due from the shareholders.

8. Profits of investing Companies

Standard accounting definition and evaluation:

Profits of investment Companies means the net profits at the end of the fiscal period when the activity has been continuous and the profits are divided between the investors of capital and the investment Company in accordance with what they both agree.

Evaluation and legal judgment:

Zakah is to be taken from the investment Company and the investor of the capital is held responsible for paying it. The share of the profits of the speculator of the capital (the work owner) is treated exactly as the commitments due to be subtracted (i.e., the speculator's share of the profits is subtracted upon calculating the base of the speculation Company).

9. Guarantees paid by clients

Standard accounting definition and evaluation:

These guarantees are commitments due to others with a Company used as insurance or guarantee to fulfill and carry out certain projects. They are evaluated on the basis of the register value.

Evaluation and legal judgment:

These are evaluated on the basis of the face value and are deemed as the due commitments that are subtracted from the Zakah assets. But if they were not due, they would not be subtracted. Also, they are subtracted only at the fiscal year in which they become due.



Calculating Zakah on Allocations


Accumulated funds represent the amounts of the revenues earned at the end of the fiscal year to meet a deficit in the assets or to meet a commitment due from an Establishment which had not properly been determined.

There are various kinds of provisions for the funds, such as:

1. Provisions for damages in fixed assets

* Standard accounting definition and evaluation:

This is a periodical amount of money reserved from revenues in order to meet the deficit in the fixed assets for purposes of use, operation, earning income or to assist the replacement process for fixed assets.

It is calculated in a technical, calculating method that differs as per the nature of the asset according to usual norms.

* Evaluation and legal judgment:

These are not deemed as commitments that must be subtracted from the assets liable to Zakah, as fixed assets are not counted in the assets liable to Zakah.

2. Accumulated funds for articles of exchanged assets

* Standard accounting definition and evaluation:

These funds are amounts of money that are reserved from revenues to meet the difference or to bridge the gap between the registering and the current values in applying the principle of care-taking.

Evaluation is based on the lesser of the two; the cost or the market value.

Some examples of these provisions are the following:

- A decline in banknote prices.

- A decline in the price of real estate meant for trade.

- Doubtful debts due to the debtor.

* Evaluation and legal judgment:

As the evaluation of the exchange assets meant for Zakah depends on their market value, these assignments are not regarded as part of the commitments that are subtracted from Zakah assets.

If, for any reason, these exchanged assets for purposes of Zakah are evaluated on the basis of the registering value while it is greater than their market value, these assignments are to be subtracted from Zakah assets.

3. Assignments to meet approximated commitments due to others

* Standard accounting definition and evaluation:

These are commitments of a Company to others, but are not precisely determined, such as provisions for severance pay, leave, taxes and compensation.

These provisions are evaluated by accountants. Also, these are deemed the responsibility of the Establishment or Company, and they appear in the profit and loss statement.

* Evaluation and legal judgment:

These commitments must be estimated accurately without any exaggeration to avoid being considered secret reserves. They are deemed as debts due subtracted from the assets liable to Zakah. If any excess is found, the difference must be deducted. Also, if this expected-to-be-paid commitment includes any late interest penalty or the like, this interest is regarded as part of the debt due to be repaid according to the Islamic point of view. Hence, interest is not subtracted from the assets liable to Zakah and only the commitment to be paid is subtracted.



Calculating Zakah on Ownership Rights


* Standard accounting definition and evaluation:

Ownership rights represent the net rights of co-owners of an establishment, and the difference between the total sum of assets after subtracting the total sum of commitments and provisions. This can be expressed by the following formula:

Ownership rights = assets - [commitments and provisions]

Ownership rights include the following items:

1 . Capital

2 . Reserves

3 . Non-distributed profits

* Evaluation and legal judgment:

Ownership rights are termed net financial obligations. Jurists dealt with ownership rights in detail in books on Islamic Jurisprudence under the topic of 'Capital'.

Here, we are going to deal with ownership rights according to the standard accounting definition and evaluation, and the evaluation and legal judgment from the perspective of calculating Zakah.

1. Calculating Zakah on capitals

* Standard accounting definition and evaluation:

This is the amount of money invested by the shareholders in a joint-stock company. Each share represents a portion of the company's capital. The capital appears in terms of the original paid value.

* Evaluation and legal judgment:

The already paid capital is regarded as the property of the shareholders and appears in terms of its paid value. It is one of the not-presently-due long term sources of finance. From the religious point of view, it is not regarded as a debt due upon the company and is therefore, not subtracted from the assets liable to Zakah.

2. Calculating Zakah on reserve funds

* Standard accounting definition and evaluation:

These funds are amounts of money reserved from the distributable net profits that are distributable for supporting the company's status or for financing its future needs or to carry out regulatory governmental laws and the like. Some of these reserves are the following:

- Compulsory legal reserves.

- Optional regulatory reserves.

- Replacing assets reserves.

- Capital reserves.

Handling these reserves is governed by regulatory laws as well as familiar calculating principles and rules. They appear in the financial status list included under ownership rights.

*Evaluation and legal judgment:

Reserves are drawn from profits which are regarded as possessions of the shareholders. These are estimated in accordance with stated credits in the registers. These reserves are not subtracted from Zakah assets for they are part of the reserved or kept profits for the shareholders who own the establishment or the company. Hence, they are not regarded as commitments.

3. Calculating Zakah on the increase of share release

* Standard accounting definition and evaluation:

These represent amounts paid by the contracting shareholders to the releases of the new shares, and they represent the difference between the original value and the price of contracting and are dealt with in the same way as capital reserves. They are also regarded as part of the ownership rights.

* Evaluation and legal judgment:

These are treated as reserves, i.e., they are not subtracted from the assets liable to Zakah.

4. Calculation of Zakah on undistributed profits

* Standard accounting definition and evaluation:

Undistributed profits were earned by a company or firm within the previous fiscal year or more, but were not distributed among the shareholders for certain reasons. This was done with the consent of the general body of shareholders regarding the project of distributing the profits prepared by the company's board.

* Evaluation and legal judgment:

Profits that have not yet been distributed are deemed as rights of the shareholders and regarded as theirs. They are not to be subtracted from Zakah assets as they, in no way, differ in ownership from reserves.

5. Calculation of undistributed losses

* Standard accounting definition and evaluation:

These are undistributed losses that have been accrued during either the present period or other previous ones, but have not been distributed among the shareholders or partners for certain reasons.

* Evaluation and legal judgment:

Undistributed losses are regarded as a decrease in the rights of ownership. They do not affect the base of Zakah.



Calculating Zakah on the Items of Revenue List


* Standard accounting definition and evaluation:

Revenues list is prepared at the end of certain periods and generally at the end of the fiscal year. This process is called profit and loss accounting.

* Evaluation and Legal Judgment

Revenues must be estimated in accordance with the generally accepted legal rules concerning earnings, especially those related to what is lawful and what is prohibited. Ill-gotten revenue should be excluded from the base of Zakah. In addition, the expenditure should be governed by the related general legal rules, i.e. to spend without either squandering or miserliness. The items included in the revenue statement do not affect Zakah directly. Rather, the base of Zakah is affected by the commitments to be deducted, as will be shown later.

1. Calculating Zakah on revenue

*Standard accounting definition and evaluation:

Revenue represents the cash flow earned by a company or an institution during a fiscal year, which had a tangible effect by increasing the inventory. Revenues include those accrued through sales, real estate, investments and commissions. This is governed by the principle of maturity in standard accounting.

* Evaluation and legal judgment:

Revenue is already included in the Zakah base such as on increase in clients and debtors or on increase in cash in banks and exchanges or cash at hand. Hence, they are not added again to the Zakah base, in order not to pay Zakah twice on the same base.

2. Calculating Zakah on expenses

* Standard accounting definition and evaluation:

General expenses are those that have been spent on services in order to facilitate the activities in an establishment or a company such as: wages, rentals, transfer and transportation and are divided into:

- Direct expenses (e.g. manufacturing expenses.)

- Indirect expenses (e.g. marketing and administrative expenses.)

* Evaluation and legal judgment:

The expenses for services have nothing to do with the object of the commodity. Such expenses are not included in the base of Zakah as explained earlier. In addition, these expenses are considered a decrease in the base of Zakah. Hence, they cannot be subtracted a second time thereby diminishing the Zakah base (in a way that does not make it possible to pay the minimum amount for Zakah).

3. Calculating Zakah on receivable interest

* Standard accounting definition and evaluation:

Receivable interest refers to interests drawn from amounts of money deposited in usurious banks, interest from securities, etc., which are included in the revenues list or in the profits and losses statement. Standard accounting does not differentiate between lawful and prohibited revenue. According to this, interest revenue is to be added to the whole inventory.

* Evaluation and legal judgment:

Interests presented by banks, securities, investment certificates, treasury bills, etc. are declared unlawful by the Holy Qur'an and Sunnah. Ill-gotten money must be avoided and immediately spent in charitable endeavors, except building mosques or printing the Holy Qur'an. It is forbidden to mix interest with the inventory of the payer of Zakah. Interest cannot be paid as Zakah for Allah the Almighty is nothing but pure and good and He accepts nothing but that which is pure and good.



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