Net Equity Concept

Definition of "Net Equity Concept"

Relating to the law of zakah, it is a concept for assess- ing the liability of zakah payable in Saudi Arabia. Briefly, zakah is payable in Saudi Arabia on the net equity of a business. It is calculated as follows: first add (a) Paid-in capital (plus owner’s account if proprietorship) at the beginning of the year. (Any addition during the year is ignored, since it does not meet the ‘passage-of-the-one-year’ condition.) (b) Retained earnings including any reserves or appropriations. (c) Net income for the year before any distribution. (d) Income to be distributed unless it is deposited in a bank under the direction of stockholders. The company has no right to withdraw any amount from it. From the total of (a) (b) (c) (d), deduct total of (e) (f ) (g), which are defined as: (e) Net fixed assets at the end of the year after deducting accumulated depreciation and any related debt, but not more than the sum of paid-in capital, retained earnings, reserves and owner’s capital at beginning of the year. (f ) Investment in another entity. (g) Actual losses for the current year or prior years. The net amount would be called ‘net equity’ for the purposes of zakah.