The Ruling on the Zakah of Goods and Debts

The questioner : I have a commercial establishment. When the time for paying zakah comes, I value the goods on hand according to their purchase price. I also find that I have debts from credit purchases, as well as debts owed to me from credit sales. Which debts must I include in the zakah calculation? Are they the debts I am owed or the debts I owe? May Allah reward you with the best reward.

The Shaykh : As for valuing them based on the purchase price, that is a mistake. The criterion is their value at the time zakah becomes obligatory, not at the time of purchase, because zakah may become obligatory, for example, in Ramadan but not be paid until Shawwal, and the price may change. The criterion is the value at the time zakah becomes obligatory, not at the time of purchase, because the value may increase or decrease.
As for the debts a person is owed, the scholars differ on how to calculate the zakah on them. The correct view is that if the debts are owed by a wealthy person, zakah is obligatory on them every year. If they are owed by a poor person, zakah is not obligatory on them, but if the person collects the debt while the debtor is still wealthy, he pays zakah on everything that has passed. If he collects the debt while the debtor is poor, he pays zakah for only one year. Do you understand now? So, if the debts a person is owed are from a wealthy person, yes, zakah is obligatory on them. We do not say he pays it out; we say zakah is obligatory on them. If they are from a poor person, zakah is not obligatory, but if he collects the debt from a poor or wealthy person, if it was from a wealthy person, he pays zakah for all the time that has passed, and if it was from a poor person, he pays zakah for only one year. This is the best that has been said regarding the obligation of zakah on debts. As for the person who owes the debt, this is also a matter of disagreement among the scholars (may Allah have mercy on them). Some said that no zakah is obligatory on the money of a person who has a debt, absolutely. Some said that a debt does not prevent the obligation of zakah, and that zakah is obligatory in all cases. Some said that if the zakatable wealth is pure wealth, such as fruits and livestock, then zakah is due on it even if he has a debt, but if it is impure wealth, such as gold, silver, and trade goods, then there is no zakah on it. The closest view is that zakah is obligatory on everyone who has zakatable wealth in his possession, even if he has a debt. For example, if he borrows one hundred thousand.
Then he buys with it goods worth one hundred thousand for trade. If a lunar year passes over them, then according to the stronger view, zakah is obligatory on them. It is said that he must pay the zakah on one hundred thousand. If he says, "These are people's money that I took," we say, "No, they were people's money when they were with the people, but now they are your money. Therefore, if they are destroyed, who is liable for them? He is liable. So they are his money. The correct view is that a debt does not prevent the obligation of zakah, and that whoever has zakatable wealth in his possession must pay zakah in all cases."