Mu' meneen Brothers and Sisters,

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One of our brothers/sisters has asked this question:

Assalam Walekum Wa Rahmatullah Wa Barakathu.

Dear Burhan Bhai

 

I pray for u that Allah will keep u always Happy and Healthy. Amin

 

As an Accountant i have question that how to calculate Zakat of the Partnership or Sole proprietor Company`s at the end of the Financial year. and the Financial report is showing the Accumulated Profit every year too. Is it on the basis of the net working capital or only on the Current Profit & Loss account ( if company is making Profit or if Loss then)?

 

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Answer:

 

Zakah determination earnings

In the name of Allah, We praise Him, seek His help and ask for His forgiveness. Whoever Allah guides none can misguide, and whoever He allows to fall astray, none can guide them aright. We bear witness that there is none worthy of worship but Allah Alone, and we bear witness that Muhammad (saws) is His slave-servant and the seal of His Messengers.

 

Every believer, regardless of whether man, woman, or child, who has excess wealth (over the ‘nisaab which is appx US$1,000.00) of their own, is liable to pay a 2.5% annual zakat of their nett excess wealth in Shariah.

 

Zakat is not determined from one’s earnings or profits, but rather on one’s net excess wealth which is left over after paying all their expenses, and it has been in their possession for a period of one calendar year. There is no zakah liable on the house one lives in, or the furniture and fixture one uses in their house, or the car one drives, etc.  But if one has property which one has bought as an investment, or spare vehicles other the one one drives, or jewelry, or any other excess asset…then zakah would be liable on these excess wealth and property.

 

Any asset, or wealth, or cash, or savings, which are left over after all of one’s expenses are paid, and that excess savings and wealth has been in their possession for one full calendar year is liable for payment of annual ‘zakat’ at 2.5% of its value.

 

Your Question: As an Accountant i have question that how to calculate Zakat of the Partnership or Sole proprietor Company`s at the end of the Financial year.

If one has a ‘sole proprietorship’ business, zakah would be calculated on the total nett assets of the business (plus whatever excess personal assets one might have), which would be:

Total Assets of the Business (-minus) Total Liabilities of the Business = Total Nett Assets of the business.

 

If one is say a 50% partner in the business, then one is to pay zakah on 50% of the Total Nett Assets of the business at the rate of 2.5% annually, being his share of Partnership in the business. 

 

Your Question: ……and the Financial report is showing the Accumulated Profit every year too. Is it on the basis of the net working capital or only on the Current Profit & Loss account ( if company is making Profit or if Loss then)?

Zakah is not an ‘income’ tax; but the right of the poor Allah Subhanah has kept in the excess wealth of the rich.  Thus regardless of whether a company makes a financial profit or loss in the financial year, as long as the company has nett assets, one would be liable to pay 2.5% annually of the total nett asset value of the business.

 

The ‘Accumulated Profit’ would obviously be in included in the Assets of the Company in the ‘Balance Sheet’.

 

The ‘Working Capital’ would be the cash or credit available to the Company to transact its business; thus one is liable to pay zakah only on the ‘Working Capital’ amount which is actually owned by the Business; which again should be included in the Assets column of the Company’s Balance Sheet.

 

The ‘Income Statement’, or the profit or loss the business makes in the current financial year has absolutely no direct bearing on the calculation of zakah; for zakah is calculated from the Balance Sheet as:

 

Total Assets of the Business (-minus) Total Liabilities of the Business = Total Nett Assets of the business.

 

Even if a company makes a loss in its current year, as long as the company has Nett Assets, it would be liable to pay zakah annually on its Total Nett Assets.

 

Whatever written of Truth and benefit is only due to Allah’s Assistance and Guidance, and whatever of error is of me alone.  Allah Alone Knows Best and He is the Only Source of Strength.

 

Your brother and well wisher in Islam,

 

 

Burhan