The core idea: whatever funded the activity and remained with the business without being absorbed into non-growing assets is the base.
1 The first method: sources of funds
Also called the indirect method, it starts from the financing side of the statement of financial position:
The equation
- Base = (sources of funds added) − (assets deducted)
- Sources added: equity and what is treated like it + long-term financing on its conditions
- Assets deducted: fixed assets, investments and what is not held for growth, on their conditions
- And the base is not less than adjusted net profit under the applicable rules
2 The second method: net assets
Called the direct method, it starts from the assets side: growing wealth is added up and the current liabilities set against it are deducted:
Cash and equivalents
Cash on hand and at banks
Receivables
After excluding bad debts on their conditions
Inventory
Trade goods
Current investments
Held for trading
Current liabilities
To the extent the rules allow
The result: net zakatable assets — the base under the direct method
Simplified data at year end (illustrative figures):
| Item | Amount |
|---|---|
| Capital | 2,000,000 |
| Retained earnings | 600,000 |
| Long-term loan | 400,000 |
| Current liabilities | 500,000 |
| Fixed assets (net) | 1,500,000 |
| Inventory | 900,000 |
| Receivables | 700,000 |
| Cash | 400,000 |
By the sources of funds method:
| Capital + retained earnings | 2,600,000 |
| + Long-term loan (meeting the conditions for addition) | 400,000 |
| Total additions | 3,000,000 |
| − Fixed assets | (1,500,000) |
| Zakat base | 1,500,000 |
By the net assets method:
| Inventory + receivables + cash | 2,000,000 |
| − Current liabilities | (500,000) |
| Zakat base | 1,500,000 |
The result is the same. The reason is that the accounting equation ties the two sides together: what was financed and did not go into non-growing assets is exactly what remains of growing wealth after its liabilities.
Which method do you use?
In practice returns are commonly prepared using the sources of funds method, because it follows the statement line items directly and is easier to document. The second method is excellent for review as an independent check — a difference between the two results signals a classification error.
3 General conditions governing the calculation
- Approved financial statements on which the figures are based.
- Each item must meet its condition: not every liability is deducted, and not every asset is excluded.
- Documenting every deduction with evidence of the item’s nature and term.
- A floor on the base, not less than adjusted net profit under the rules.
- The length of the zakat year and its effect on the rate applied.
The conditions are set out in the regulations
What is added, what is deducted and the conditions for each item — including the requirement that long-term financing remain invested in deducted assets — are set out in the zakat collection rules, and they are subject to amendment. Do not rely on a general rule for a specific case.
Lesson summary
- Base = sources of funds added − assets deducted.
- The second method: growing wealth − matching liabilities, reaching the same figure.
- A difference between the two results indicates a classification error.
- Every item has a condition governing its addition or deduction, evidenced by documents.
- The base is not less than adjusted net profit under the rules.
4 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. The base came out differently under the two methods. What does that most likely mean?
The two methods are two faces of one equation; a difference means a classification problem that calls for review.
2. Why are fixed assets deducted from the base?
The deduction rests on the growth condition, not on ownership and not on depreciation.
3. What is the value of using the second method in review?
Reaching the same figure from a different starting point is the strongest evidence that the calculation is sound.