How do we pay the zakah on trade goods?

The questioner: That is, when they calculate, and when they calculate the assets, and when they calculate such and such, you came with capital and built a factory. This factory, according to the laws and regulations, is consumed in financial value over a period of ten years. So every year, a deduction is made from the capital in the balance sheets or assets for the value of this annual depreciation. Consequently, as a result of this depreciation, you have profits, or you do not. The image of the profit and the image of the assets are linked by the method of accounting, whereas the reality on the ground is different; you still have large assets and you are making profits, and so on. So, is it permissible for the zakah calculation to adopt the accounting methods related to the company? This is my question:

The questioner : ... .

The Shaykh: Go ahead.

The questioner: A car in the company, for example, is worth ten thousand dinars in the year it was purchased. After each year, its depreciation goes down, meaning it becomes nine thousand, and in the second year it becomes eight thousand, and so on. And even... you will not sell it for ten thousand; you will sell it for two thousand at the end, meaning after ten years, or perhaps it will be worth nothing. So this is the intent, and an example of the same machines that are being consumed, meaning a machine... a thousand dinars a year; perhaps after twenty years it will be worth nothing.

The Shaykh: Excuse me, are the machines for sale or for the company?

The questioner: A manufacturing machine, for example.

The Shaykh: There is no zakah on these, my brother. There is no zakah on these in the first place. If this type is in the original state, and if I may use the expression, they... have no zakah, whether for the first year, the second year, or the third year. Do you mean this?

The questioner: I mean that... a company has a balance sheet:

The questioner: ... a section as the value of depreciation for this... .

The questioner: So at the end, a profit appears at the end of the year like this, and it is estimated at such and such:

The questioner: ... the profit.

The questioner: As a result of the company's operations, and then... at the same time, as a result of deducting this depreciation:

The questioner: Excuse me, let me comment. The deduction for depreciation means replacing the machine that is getting damaged. It becomes money that you use to buy the replacement, to buy a substitute for it, and so on. Usually, this money is spent, meaning it is not profit. This... for the company, you want to replace the assets, so you set aside money.

The questioner: Complications in the company in the current situation, meaning what Adnan is saying:

The questioner: There is merchandise for trade, and this is what is understood to be subject to paying charity. Apart from that, items that facilitate the trading process, such as a car for transporting goods, are not considered trade goods and thus are not counted. Likewise, the machines, the shop rent you paid for, and similar things are not counted. What Adnan is saying is the following: With these accounting methods, to extract at the end of the year how much your profit is, what do they do? They say: At the beginning of the period, we had merchandise worth a thousand dinars. During the period, we purchased goods for five thousand dinars, so it became six thousand dinars. We sold for seven thousand dinars, and we have merchandise worth two thousand dinars. So seven thousand plus two thousand is nine thousand. We had merchandise worth a thousand and purchased for six thousand, which is seven thousand. The difference between them is two thousand, which is the profit. But for accounting purposes and income tax purposes and so on, they do not tax you on this profit. You start to deduct from this profit, saying: I bought a car at the beginning of the project. I bought this car for ten thousand dinars. They allow you to depreciate it by fifty percent each year, reducing the value of this car by twenty percent, and they start to remove... and from here comes the issue of provisions, where they remove a sum of money as a reserve so that after five years, you will have the ability to buy a replacement car, which is the replacement value.
In my estimation, after my understanding... that what charity is paid on is not the customary accounting matter, but the actual value of things. The car... even if it is depreciated, it has no relation; there is nothing on the merchandise. The merchandise... now in companies, there is a principle they use in the accounting system that says: cost or market price, whichever is lower? This is an accounting principle. I have five thousand units of pants. The goods are priced at the end of the year so that I can determine my profit and distribute it to the partners. What do they do? ... Five thousand pants with their thread and so on. Either what was their cost, how much did they cost me? Or how much are they worth in the market? And they take the lower of the two. If the market price is lower now, it means the merchandise is no longer worth its cost; you have lost money. So consequently, they price it at its cost, which is valid in this market. If the market price is higher, for the sake of caution... .

The Shaykh: Well, what does this concern us regarding the zakah?

The questioner: It concerns us, sir, in determining the rate of profit. How is the rate of profit determined?

The Shaykh: Professor, the rate of profit does not need to be known because the profit will be realistic. We have two things: we have trade goods, which in your example are...

The questioner: Sir, excuse me, the profit here will not be realistic.

The Shaykh: Let me finish. We have two things, as I understood. We have the pants; these pants are trade goods, and we have the profit that we will obtain from selling these pants. Is that correct up to here?

The questioner: Yes.

The Shaykh: Well, as we explained earlier, here we have two zakahs: zakah on the money we profit from selling these trade goods, and zakah on the trade goods themselves. So, for example, you have a thousand pants, so you pay out fifty, one hundred, and so on. What remains? A thousand minus one hundred, for example. You sold half of them, and so on, and you made a profit. Did the profit you made reach the nisab (minimum threshold) or not?
It reached the nisab. Clearly, it did not reach the nisab. You have money beforehand that you add to it and pay its zakah. What concerns us in this detail?

The questioner: ... When you asked about the reserve... the reserve for losses, and so on, as long as it is cash that you have, whether it is a reserve or a depreciation provision or whatever it is called, as long as it is cash that you have, you do not pay zakah on it. You pay zakah on trade goods as trade goods. There is no longer any issue:

The questioner: ... that when you calculate what zakah is due on the profit and so on, you do not look at the balance sheets to see what the net profit comes out to be at the end. Rather, you look at how much cash there is? And how much merchandise? And how much in...? That is, you need to separate the zakah calculation from the company's balance sheet calculations. This is what I mean:
... neither this nor that. We agreed that there is a type of merchandise that is not... just.

The questioner: No problem:

The questioner: ... defined.

The Shaykh: Let me understand from Abu Yahya. Abu Yahya, what is our response?

The questioner : This is what I want to say.

The Shaykh: Go ahead.

The questioner: Now I want to determine what I gained in profit:

The Shaykh: Do not say: what I gained. You are one person; do not make it complex for me. You are one person, you are a merchant with a thousand pants. Go with your example.

The questioner: But I do not want to assume that this company is one merchant. I am assuming.

The Shaykh: My brother, let us solve the problem simply with one person, and then we will move on and see. Because when I give you the answer that the matter has no issue, either it is zakah on trade goods or zakah on the profit, and there are two, so when I say that there are these, I think you are imagining a company, but you are imagining a merchant. No, let us solve it now.

The questioner: Good... .

The Shaykh: Allow me a moment to clarify the speech. Now, you had a company in your mind, and I have an individual merchant in my mind. With this clarification, is there an issue with our previous answer?

The questioner: No, to detail the matter, I want to say: that this merchant made a profit.

The Shaykh: You did not answer me. Is there an issue?

The questioner: And then we will solve it.

The Shaykh: Yes, heh.

The questioner: ... but let me now... let me say: I am one merchant and I have a hundred pants. Now my profit... at the end of the year, and I add it to my nisab. I am imagining I want to take... and... it will not happen like that. It does not happen that I will take a part of it.

The Shaykh: What do I need all this... for? I want to study the reality, may Allah reward you.

The questioner : ... .

The Shaykh: No, you are saying: by doing the calculation:

The questioner : ... in two types of what they call capital. In the capital that the partners deposit, or that the owner of the establishment deposits when establishing this business, which is the building, the machinery, and the assets that can operate the factory. Then there is money allocated for purchasing goods and selling these goods, and profit arises from this process, which is the dealing with this money.
But I believe that we have frozen it or immobilized it in the business, and then there is the money with which we buy goods to convert them into other goods to sell, from which profit arises. Perhaps the ambiguity arises from the confusion between the profit and this money, which is liquidity. Is this money that we circulate subject to zakah or not? Because this is general money, O Shaykh. And the matter of the profit is clear. Perhaps this money, which is liquidity or what we move in, is what is causing all the difficulty; because all the confusion in these matters arises from this cash or the working capital, not from the frozen capital. And I believe the complexities in this area are...