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.

9. 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.

 

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