The rule for additions: whatever was a source of financing for the activity and remained in it for a full year is added to the base, regardless of its accounting label.
1 Equity
| Item | Prevailing treatment | Note |
|---|---|---|
| Capital | Added | The most important permanent source of financing |
| Retained earnings | Added | Funds that stayed in the activity and were not distributed |
| Reserves | Added | Statutory, contractual or general |
| Accumulated losses | Deducted within equity | Because they genuinely reduce the sources of financing |
| Profit for the period | Treated under the rules | Observing the adjusted profit floor |
2 Provisions
A provision is an amount set aside to meet an obligation or a decline in an asset. Its zakat treatment follows its substance, not its name:
A provision for a real obligation
It matches an actual debt
A precautionary provision
Closer to retaining profits
The test
Is it an actual obligation or a cushion?
The treatment
Provisions of a precautionary nature are added
The label is not enough — what counts is the item’s nature under the applicable rules
A recurring point of dispute
Provisions for doubtful debts, end-of-service benefits and slow-moving inventory are among the items most often adjusted on audit. Check the rule in force for each provision and have ready what proves its nature and the basis of its estimate.
3 Long-term financing
Loans and long-term financing are a source of funds just like equity. They are therefore added to the base on condition that they financed deducted assets — fixed assets or long-term investments — and only to the extent actually invested in them.
A business borrowed SAR 1,000,000 and bought a machine with it. The effect on the base:
| + Long-term loan (a source of financing) | 1,000,000 |
| − The machine (a deducted fixed asset) | (1,000,000) |
| Net effect on the base | Nil |
The meaning: the loan did not increase growing wealth, because it turned into a non-growing asset. Had the loan remained as cash or inventory, its effect would show in the base — and that is the point of tying the addition to the deduction.
4 Other items to look at carefully
- Partners’ current accounts: examine their nature — financing or a short-term liability?
- Advances from customers: depending on whether they are an operating liability or financing.
- Proposed dividends and the timing of the distribution decision and its approval.
- Islamic financing in its various forms, treated according to its economic substance.
- Other long-term liabilities and whether the conditions for addition apply to them.
A practical approach
Build a reconciliation schedule that starts from the statement figures as they are, then a line for every addition and every deduction with the support for each. That schedule is exactly what you will be asked for on audit, and preparing it as you go is far easier than reconstructing it a year later.
Lesson summary
- Every source of financing that stayed in the activity is added: capital, retained earnings and reserves.
- Accumulated losses reduce the sources of financing and are therefore deducted.
- Provisions are treated according to their nature, not their label.
- Long-term financing is added on condition it was invested in deducted assets, and to their extent.
- The reconciliation schedule with its supporting evidence is your reference on audit.
5 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. A business borrowed an amount and left it as cash at the bank until year end. The likeliest effect on the base?
The deduction depends on the financing being invested in deducted assets; left as cash, it stays within growing wealth.
2. A general provision the business set aside as a cushion with no specific obligation. The closest treatment:
What matters is the item’s nature: anything not matching an actual obligation is treated as a reserve.
3. Large accumulated losses within equity. Their effect?
The losses consumed part of the financing, so it would be wrong to count sources of funds that no longer exist.