How to calculate zakat on a business
From zakat date to zakat due in five steps, with a bakery’s balance sheet as the example.
Zakat on a business works like zakat on savings: wealth you have held for a full lunar year, above the nisab, is purified by giving away 2.5% of it. The difference is that a business holds more than cash. This guide walks through the calculation with a real balance sheet, following AAOIFI Shari’ah Standard 35, the method most Islamic financial institutions use.
Step 1: choose your zakat date
Zakat is due once every lunar year, the hawl. Most businesses pick a fixed date, such as 1 Ramadan, and use the balances of that day. If your books run to a financial year end such as 31 December, you can use that date instead, at a slightly higher rate: see lunar or solar year.
Step 2: take a trial balance on that date
A trial balance lists every account in your books with its balance. Export it from your accounting software for the zakat date. What matters are the balance sheet accounts: what the business owns and what it owes. Profit and loss accounts don’t affect zakat, except to work out a gross margin for stock.
Step 3: add up what counts
- Cash and bank balances, including savings and payment-provider accounts.
- Money customers owe you, as long as you expect to be paid.
- Stock, at what it would sell for on the zakat date.
- Raw materials and work in progress, at their current value.
- Investments held to sell, and gold or silver, at today’s value.
Leave out what you use to run the business: equipment, vehicles, premises, software and goodwill. They are tools, not wealth held for trade (AAOIFI 4/1). Prepaid expenses and bad debts don’t count either.
Step 4: deduct debts due within a year
Subtract what the business has to pay in the coming 12 months: suppliers, taxes due, wages and bills, payments received in advance, short-term loans and the next year’s repayments on long-term loans. Interest isn’t deducted, provisions only once they are paid or fall due, and under AAOIFI debts that paid for fixed assets aren’t deducted either. More in which debts you can deduct.
Step 5: check the nisab and apply the rate
What is left is the zakat base. If it is at least the value of 85 grams of gold (AAOIFI) or 612.36 grams of silver (NZF) on your zakat date, zakat is due: 2.5% of the base for a lunar year, 2.577% for a solar year.
A worked example
| Account | Balance | For zakat |
|---|---|---|
| Bank | 18,420.00 | Counts: 18,420.00 |
| Customers who owe for bread and cakes | 6,150.00 | Counts: 6,150.00 |
| Stock (cost 9,800.00) | 9,800.00 | Counts at selling value: 11,200.00 |
| Ovens and fittings, after depreciation | 18,000.00 | Doesn’t count |
| Suppliers | (4,300.00) | Deducted: 4,300.00 |
| VAT due | (2,120.00) | Deducted: 2,120.00 |
| Loan for the oven, 3,600.00 due this year | (18,000.00) | Not deducted: it paid for equipment |
| Zakat base | 35,770.00 − 6,420.00 = 29,350.00 | |
| Zakat due at 2.5% | 733.75 |
Under NZF guidance the oven loan’s repayment of 3,600 is deducted as well, which makes the base 25,750 and the zakat 643.75. Both are reasonable; the method page shows every point where the two differ.
Who pays it
A sole trader pays all of it. In a partnership each partner pays for their share, and in a company the shareholders do, unless the company pays on their behalf. See zakat for sole traders, partnerships and companies.