Net Working Capital versus Net Owner's Equity Approaches to Computing Zakatable Amount A Conceptual Comparison and Application

Abstract

Introduction
Zakah is a form of tax and alms mandated by Islam? The concepts underlying
zakah are that the rich are responsible for the poor and the poor have
the right to receive zakah. This does not imply that Islam is anticapitalist;
in fact, Islam motivates the rich to invest funds so they will not be diminshed
by paying zakah. Islam opposes idle savings, as it encourages the investment
of funds for increased production, employment, and assistance to the poor.~
Zakah is ordained by the Qur'an, but its technical details are interpreted by
the rules and jurisprudence of Islam.
All economic entities maintain financial records of some kind and prepare
financial statements according to generally accepted accounting standards.
These records and statements are designed for different purposes and are
not necessary for determining the amount of wealth subject to zakah. Many
researchers have investigated the methods employed to determine the zakatable
amount levied on trade assets ('Urud al tijarah). These methods may be summarized
into two approaches: a) the net working capital approach and b)
the owner's equity approach.
This paper investigates the feasibility of using the net working capital
approach (i.e., accounting principles) and the owner's net equity approach
(i.e., the Saudi system) to determine the zakatable amount of trade assets.
It will also show the relationship between the two approaches.
This paper is divided into five sections: a) introducing the principles
and conditions of zakah accounting for businesses; b) discussing the net working
capital approach and how to determine the growing capital as the basis
for ascertaining the &table amount by analyzing the elements of working
capital and the financial transactions during the year; c) analyzing the owner's
equity approach used in Saudi Arabia to determine the &table amount;
d) applying both approaches to a numerical example; and e) contrasting the
growing capital with the zakatable amount.
Principles and Conditions of Trade Zakah
('Urud al Tijarah)
There are two types of assets. The first type, which is not subject to
zakah, includes those capital assets owned for the purpose of using them
in one's business. Examples of such assets are the tools and machines used
for production or marketing. The second type, which is subject to zakah,
includes those assets manufactured or purchased for malung a profit by reselling
them ...