Q: How does one use a balance sheet for Zakat calculation?

A: The value of stock and inventory on a balance sheet reflects the cost price and not the current retail price. Therefore, one should try his best to accurately determine the total value of the retail prices of his stock. To get a more accurate representation of the retail price of stock, one may apply a conservative gross margin percentage to his current stock to get an idea of the current retail price of the stock. Remember, gross margin is net sales less the cost of goods sold. This can be determined from the income statement.

Determining Gross Margin Percentage

Step 1: Look up Net Sales and Cost of Goods Sold in the income statement found in the company’s accounts.

Step 2: Minus the Cost of Goods Sold from Net Sales. This will give you a gross profit figure.

Let’s assume that a company has net sales of £50,000 and its cost of goods sold is £40,000. This means its gross profit is £10,000 (net sales of £50,000 minus its cost of goods sold of £40,000).

Step 3: Calculate the percentage of gross profit in relation to the net sales.

£10,000 (gross profit) is 20% of £50,000 (net sales). Therefore, the gross margin percentage is 20%.

Step 4: Apply the gross margin percentage to the value of stock on your balance sheet.

If the current stock is valued at £100,000, the proxy of 20% can be utilised by adding 20% to the current stock value. Therefore, the current stock can be estimated to be worth £120,000 at retail price.

It would be praiseworthy and prudent to pay extra Zakat on stock to cover any possibility of miscalculation.

And Allah knows best!