Presentation On the Topic:

Treatment of Zakat in Financial Statements: Expense or

Appropriation of Profits
Prepared by: Submitted to:
Naman Dr. Mohd Nayyer Rahman
Faculty No: Subject:
22IFMMA238 Accounting for Islamic Transactions
Enrolment No: {M.B.A. (IBF) 3rd Sem.}
GJ5942
 Concept of “Zakat”
Zakat is the third pillar of Islam, which is a mandatory religious tax paid by Muslims who possess more
than a specified minimum level of wealth (Nisab), which is to be disbursed according to Shariah teachings.
Zakat is an obligatory act upon all qualifying Muslims and is the undertaking of submitting a set
percentage of his or her profitable wealth to charity. Zakat serves as a means to purify one's wealth and
income and to promote social welfare and economic justice. Zakat is a specific percentage (usually 2.5%)
of a Muslim's accumulated wealth and savings that must be distributed to those in need. It is designed to
redistribute wealth from the affluent to the less fortunate, reducing poverty and economic disparities. Zakat
recipients include categories such as the poor, needy, orphans, widows, and others in financial need, as
defined by Islamic jurisprudence. Zakat is calculated and paid annually based on the lunar calendar, with
wealth that remains above the Nisab (a minimum threshold) for one lunar year becoming eligible for
Zakat. This practice not only fulfills a religious obligation but also contributes to the broader social and
economic welfare of the Muslim community. Zakat is distinct from Sadaqah, which refers to voluntary acts
of charity.
 Key Takeaways:

● Zakat is an obligatory act upon all qualifying Muslims.

● It is a form of charity and giving a portion of wealth to the poor and needy.
● It purifies the earning of an individual in a year and liberates them from greed and
selfishness.
● It is a way to be at peace and maintain harmony in society
● Zakat has to be donated on excess wealth including money in the bank account or at home,
possession of gold/silver, agriculture produce, livestock earnings, and profits from stocks and
investment.
● The common minimum amount for those who qualify is 2.5% or 1/40 of a Muslim's total
savings and wealth.
 Expense v/s Appropriation of Profit

Aspect Expense Appropriation of Profits

Allocations of a portion of profits or income for

Costs incurred in the day-to-day operations of
specific purposes or reserves. This may include
Definition a business, such as rent, salaries, utilities, and
dividends, bonuses, charitable contributions,
supplies.
etc.

Ordinary business costs that reduce the Special allocations of profits, often with a
Nature
profitability of a company. specific purpose in mind.

Appropriations are typically disclosed in the

Presentation on Expenses are listed on the income statement
financial statements, such as in a note to the
Financial (profit and loss statement) and reduce the
financial statements, showing how profits are
Statements reported net profit.
allocated. They do not reduce net profit.
 Appropriations are typically not
Expenses are generally deductible
deductible for tax purposes, as they
Deductibility for Taxation for tax purposes, reducing the
represent profit allocation rather than
taxable income of a business.
business costs.

Examples of profit appropriations

Examples of expenses include rent, may include dividend payments,

Examples employee salaries, utilities, and bonuses to employees, contributions

office supplies. to reserves, and allocations for

charitable giving.
 Accounting Treatment of Zakat

Zakat is treated as a non-operating expense in the financial statements of Islamic financial

institutions and is included in the determination of net income in the income statement. Unpaid
Zakat is treated as a liability and presented in the liabilities section in the statement of financial
position of Islamic financial institutions.
Zakat is not an appropriation of profit, and it does not affect the distributable profits of Islamic
financial institutions.

● Recognition: Zakat is recognized as an expense on the income statement.

● Measurement: The Zakat liability is calculated based on eligible assets and income.
● Disclosure: Zakat is typically disclosed in the financial statements, often in a note to the
financial statements.
● Impact on Profitability: Zakat reduces reported net profit, reflecting the charitable distribution
of income.