ACCOUNTINGFORZAKAHFUNDS:ANOTE

MohammedAlim1

OBJECTIVE

Thepurposeofthisnoteistoexplainhowanotforprofitorganization(NPO)whichcollects
anddistributeszakahaspartofarangeofsociallybeneficialactivitiesshouldpractice
transparentaccountingmethodstoensurecompliancewiththeShariahstipulationregarding
thebeneficiaries.TheholyQuran[9:60]clearlyspecifiesthetypesofbeneficiarieswhoare
entitledtoreceivezakah.

Theseare:
1.Thepoor
2.Theneedy
3.Thoseindebt
4.Employeesofzakahorganization
5.Thoseinbondage
6.Thetravelers
7.Thosewhoseheartsarereconciledtowardsthetruth
8.ThosestrivinginthepathofAllahSWT

AnimportantpreconditionforanNPOtoefficientlycollectanddistributezakahfundsisits
credibilityinthesociety.Thisinturn,isdirectlyrelatedtothetransparencyofitsaccounting
methodsthatensureseparationofzakahfromothersourcesoffunds,suchas,sadaqah
(donationsfreefromrestrictionsregardingintendedbeneficiary),qard(interestfreeloans),
cashwaqf(endowment),forprofitinvestments,etc.Zakahbeinginthenatureofworship
(ibadah),anyperceivedinabilityorunwillingnessonthepartoftheNPOtomaintainawallof

1
MohammedAlimisaprospectivestudentofAccountingattheUniversityofWales,UK.ThisNoteispartofan
ongoingstudyonAccountingforIslamicNotforProfitOrganizations(NPOs)undertheguidanceofDrMohammed
Obaidullah.ContentsoftheNotemustnotbereproducedorquotedwithoutpriorpermissionoftheauthor.The
authormaybecontactedatalim.mohammed93@yahoo.com
separationbetweenzakahandothermechanismsofsociallybeneficialactivitiesmayseriously
hamperitszakahmobilizationefforts.

AHYPOTHETICALEXAMPLE

BelowweuseahypotheticalexampleofasampleoffinancialtransactionsbyanNPOto
highlighthowtheNPOmayaddresstheaboveconcernofzakahpayersthroughappropriate
accountingmethods.Wepresenttwoscenariostodemonstratethedifferentialaccounting
treatmentofzakahbetweenanaccountingsystemthatiscompliantwiththeaboveShariah
stipulationandonethatisnot.Tosimplifytheexample,weassumethatinbothcases,zakah
andsadaqaharetheonlytwosourcesoffundsfortheNPOanditusesthefundsforrunninga
schoolandahospital.WealsoassumethattheNPOcommencesoperationswithazerobase.

ThefollowingfinancialtransactionstakeplaceduringatimeperiodX.

1. Adonates50,000INRtotheNPOaszakah
2. Cdonates250,000INRtotheNPOaszakahand50,000INRassadaqah
3. Paymentofsalaryof60,000INRtoschoolteachersbyschool
4. ThehospitalpaysINR400,000towardspurchaseofmedicalequipmentoncredit
5. TheNPOpays35,000INRforsalaryofallitsstaff(hospitalstaff:25,000INR,zakah
officers:10,000)
6. Theschoolpays5,000INRforpurchaseofconsumables
7. Thehospitalpays60,000INRasfeestodoctors
8. TheNPOpays50,000INRforrentforbuildingwhichhousestheschoolandhospital
9. Bdonates150,000INRtotheNPOassadaqah
10. Schoolcollectsfeeof50,000INRfromstudents
11. Hospitalcollectsfeeof150,000INRfrompatients
12. TheNPOhasoutstandingfeesof12poorstudentsamountingto24,000INR,50%of
whichmayhavetobewrittenoff
13. TheNPOhasoutstandingduesfrom10patientswhoareunabletopayamountingto
15,000INR,10%ofwhichmayhavetobewrittenoff
14. Thehospitalmakespaymentof250,000tosupplierofequipment
15. TheNPOundertakesapromotionalcampaignformobilizationofdonationsatacostof
55000INR;paymenttobemadeaftertwomonths.

SCENARIOONE

TheNPOmakesthefollowingentriesinitsjournalcorrespondingtotheabovetransactions.
No. Account Dr. Cr.
1. Cash 50000
Donations 50000
2. Cash 300000
Donations 300000
3. Salaries 60000
Cash 60000
4. Equipment 400000
AccountsPayable 400000
5. Salaries 35000
Cash 35000
6. Consumables 5000
Cash 5000
7. ConsultingCharge 60000
Cash 60000
8. Rent 50000
Cash 50000
9. Cash 150000
Donations 150000
10. Cash 50000
SchoolFee 50000
11. Cash 150000
HospitalFee 150000
12. FeeReceivable 24000
SchoolFee 24000
12. ProvisionforDoubtfulDebt 12000
FeeReceivable 12000
13. FeeReceivable 15000
HospitalFee 15000
13. ProvisionforDoubtfulDebt 1500
FeeReceivable 1500
14. AccountsPayable 250000
Cash 250000
15. AdvertisingandPromotion 55000
AccountsPayable 55000

TheledgerwouldhavethefollowingTAccounts.

CASH DONATIONS
1. 50000 3.60000 1.50000
2. 300000 5.35000 2.300000
9.150000 6.5000 3.150000
10.50000 7.60000
11.150000 8.50000 500000
14.250000
700000 460000
Bal.240000
SALARIES
3.60000
5.35000
EQUIPMENT
4.400000 95000

CONSUMABLES CONSULTINGCHARGE
6.5000 7.60000

RENT SCHOOLFEE
8.50000 10.50000
12.24000

HOSPITALFEE 74000
11.150000
13.15000 FEERECEIVABLE
12.24000 12.12000
165000 13.15000 13.1500

39000 13500
PROVISIONFORDOUBTFULDEBT Bal.25500
12.12000
13.1500
ACCOUNTSPAYABLE
13500 14.250000 4.400000
15.55000

PROMOTION 250000 455000
15.55000 Bal.205000


 NowwemaypreparetheBalanceSheetandIncomeStatementofourNPO.

BalanceSheetofNPOasontimeTn

Assets Liabilities
Cash 240000 Accountpayable 205000
Equipment 400000 Corpus(donation)fund 500000
Consumables 5000 LosstransferredtoCorpus (21000)
Feereceivable 25500
Provisionfordoubtfuldebt 13500
Totalassets/liabilities 684000 684000

IncomeStatementofNPOforperiodT0Tn

Hospitalfee 165000
Schoolfee 74000
TotalRevenue 239000
Rent 50000
Promotion 55000
Salaries 95000
Consultingcharge 60000
TotalExpenses 260000
Netprofit(loss) (21000)

OBSERVATIONS

Theaccountingsysteminthiscasedoesnotrevealhowthezakahfundshavebeenutilizeddue
toitscomminglingwithsadaqafunds.Thebeneficiariesoftheschoolandhospitalinclude
extremelypoor,moderatelypoorandrichandallarechargedfortheservicesatapricethat
mayindeedincludeasubsidyelementfinancedfromdonations.Theaboveexampleshowsa
lossof21000INRabsorbedbythecorpusfund.Thus,thoughtheNPOmayhaveprovideda
sociallydesirableserviceatalowcost,thereisnodiscriminationinfavorofthepoor,whichthe
Shariahenvisagesthroughtheinstitutionofzakah.ItisapossiblescenariothattheNPOgoes
ontowriteoffthereceivablesduefromthepoor.Butthisbenevolenceisnotcapturedbyits
accountingsystem.WenowturntoScenarioIIasanalternativesystemofaccounting.

SCENARIOTWO

Inthisscenario,theNPOnowcreatesaZakahFundunderitsumbrellamanagedbyadistinct
ZakatUnit.ThisUnitkeepstrackoffundsmobilizedaszakah,maintainsseparaterecordsofits
ownadministrativeandotherexpensesandissuesticketstothepoorandneedyafter
investigatingtheirfinancialconditionthatentitlesthemtoavailwaiversinschoolfeesand
hospitalcharges.Thetransactions,journalentriesandledgernowundergosomeminor
modifications,buthavesignificantconsequencesintermsofimprovedtransparencyasfollows:

1.Adonates50,000INRtotheNPOaszakah
2.Cdonates250,000INRtotheNPOaszakahand50,000INRassadaqah
5.TheNPOpays35,000INRforsalaryofallstaff(hospitalstaff:25,000INR,zakahofficers:
10,000)
9.Bdonates150,000INRtotheNPOassadaqah
12.TheNPOhasoutstandingfeesof12poorstudentsamountingto24,000INR,50%of
whichmayhavetobewrittenoff(thepoorstudentscollectafeewaiverticketfromthe
zakahoffice)
13.TheNPOhasoutstandingduesfrom10patientswhoareunabletopayamountingto
15,000INR,10%ofwhichmayhavetobewrittenoff(thepoorpatientscollectfeewaiver
ticketfromthezakahoffice)

No. Account Dr. Cr.

1. Cash 50000
Zakahfund 50000
2. Cash 300000
Zakahfund 250000
Corpus(sadaqah)fund 50000
5. Salaries(ZU) 10000
Salaries 25000
Cash 35000
9. Cash 150000
Corpus(sadaqah)fund 150000
12. Zakahdisbursement 24000
SchoolFee 24000
13. Zakahdisbursement 15000
HospitalFee 15000

ZAKAHFUND CORPUS(SADAQAH)FUND
1.50000 2.50000
2.250000 9.150000


300000 200000

SALARIES ZAKAHDISBURSEMENT
3.60000 12.24000
5.25000 13.15000

85000
39000

SALARIES(ZU)

5.10000

NowwemaypreparetheIncomeStatementandtheBalanceSheetoftheNPO.

BalanceSheetofNPOasontimeTn

Assets Liabilities
Cash 240000 Accountpayable 205000
Equipment 400000 Corpus(donation)fund 200000
Consumables 5000 LosstransferredtoCorpus (11000)

Zakahsurplus 251000
Totalassets/liabilities 645000 645000

IncomeStatementofNPOforperiodT0Tn

Hospitalfee 165000
Schoolfee 74000
TotalRevenue 239000
Rent 50000
Promotion 55000
Salaries 85000
Consultingcharge 60000
TotalExpenses 250000
Netprofit(loss) (11000)

StatementofzakahcollectionanddisbursementforperiodT0Tn

Zakahfundscollected 300000
Zakahdisbursement 39000
Salaries(zakahunit) 10000
TotalExpenses 49000
Zakahsurplus 251000

OBSERVATIONS

ItisnowclearfromtheStatementofzakahcollectionanddisbursementthattheNPOisholding
ahugezakahsurplus,whichremainstobeutilized.Thisisnotproperaccordingtorulesof
zakahandcannotbejustifiedbasedongroundrealities,giventhatthepoordeservemassive
supportfortheireducationandhealthneeds.Thisindeedcallsforproactiveactionandsharing
ofinformationbytheNPOtoattractthepoorsothattheymaybenefitfromitszakahfinanced
activities.Onthecontrary,thereseemstobeastrongmotivationfortheNPOnottodoso.It
wouldperhapsbemoreinclinedtoseetheaccumulationofzakahsurplusasajustificationfor
investmentofsuchsurplusinforprofitavenues,especiallywhenitreportsanoverallfinancial
loss.However,thiswouldamounttoamissiondrift,whichmayprovedisastrousforthelong
termsustainabilityoftheNPO.