Prepaid Expenses vs Accrued Expenses: Accounting Treatment and Examples
Namrata13 Nov 2026
A business could be selling great and still be struggling to make any money.
Revenue isn't necessarily an indicator of a healthy business. Take out the payments to your suppliers, your staff salaries, your rent and all your other expenses and what's left over could be rather modest.
For UAE businesses, the issue of profitability is even more pertinent given the pressure they're under from rising operating costs, supplier costs and taxation.
Quick Answer
You can calculate gross profit by subtracting the cost of goods sold from revenue. Take off operating expenses to get operating profit. Then deduct interest, taxes and all the other non-operating items to get to net profit. When you look at all three of those figures you can get a much better sense of the actual profits of a business and have a much better idea of where your costs are.
But you can't just look at one profit figure.
Gross profit, operating profit and net profit are all telling a very different story regarding the performance of the company.
Knowing these figures enables business owners to spot wasteful spending, review their pricing and see exactly how much money the business is actually making.
What is profit and why are there 3 types?
| Quick fact: profit is what’s left after you've deducted the cost of doing business from your revenue. Different profit figures have different cost bases in them. |
The income statement works out the profitability step by step.
- Gross Profit: Gross Profit is the revenue remaining after you've deducted the cost of producing or purchasing the goods that you've sold.
- Operating Profit: It’s the profit after deduction of operating expenses from gross profit.
- Net profit: That's the final earrings after all the expenses (including interest and tax).
The calculation is performed by a simple sequence:
Revenue - Gross Profit - Operating Income - Net Income
Each level addresses a different financial question.
A company can have a good gross profit and a bad operating profit if its admin costs are too high.
Similarly high operating profits don't necessarily translate into high net profits if the financing costs are high.
How to Calculate Gross Profit
Gross profit is the money you have left over after you've taken away your cost of goods sold (COGS) from your total sales. It’s a very important indicator of the health of your business and how efficiently you're running it.
Gross Profit Equation
Gross Profit = Revenue - cost of goods sold (COGS)
Let's assume we have a trading company based in Dubai with sales of AED 200,000 and having spent AED 120,000 to buy the goods it sells.
Gross Profit = AED 200, 000-AED 120, 000
Gross Profit is AED 80,000
This figure still has to cover the running costs of the business as well as all other costs.
What Does COGS Include?
Cost of Goods Sold typically includes expenses directly related to the products sold, such as:
- Raw materials used in the production.
- Direct labour used in manufacturing.
- Manufacturing overheads.
- Cost of goods sold.
- Office rent and general marketing expenses are not generally included in COGS.
Gross profit margin formula is
- Gross Profit Margin = (Gross Profit/Revenue) x 100
See the previous example:
(AED 80,000 / AED 200,000) x 100 = 40%
This means the company keeps AED 40 of every AED 100 in sales prior to operating expenses.
Gross profit margin is a useful measure for a business to use in assessing product pricing, production efficiency and purchasing costs.
How to Calculate Operating Profit
| Short answer: Operating Profit is the money a company makes from its core activities, less the direct costs and operating expenses. |
A company can have a massive gross profit and yet spend the vast majority of that on its day to day running.
Operating Profit Equation
Gross profit – Operating expenses = Operating profit
Typical operating expenses include:
- Office and warehouse rental.
- Salaries of administrative personnel.
- Sales and advertising.
- Utilities, internet and electricity.
- Depreciation and amortization.
For example, if the trading company has a gross profit of AED 80k and operating expenses of AED 45k.
Operating Profit = AED 80,000 - AED 45,000
Operating Profit AED 35,000.
The business generates AED 35k from its core business prior to non-operating items and tax.
Equation of operating profit margin
Operating Profit Margin = (Operating Profit / Revenue) * 100
(AED 35,000/AED 200,000) * 100 = 17.5%
It's a good indicator of how well the business can control its operating costs.
If sales are flat then a falling operating margin would be an indicator of rising admin costs.
How to Calculate Net Profit
| Short answer: Net profit is the amount of money the business makes at the end of the day having taken into account all the costs of doing business (i.e. all the operating costs, the financing costs and the taxes). |
It's called the bottom line because it's on the bottom of the income statement.
Formula for Net Profit
Net Profit = Gross Profit - Operating Expenses
Or if there are no other nonoperating gains or losses:
Net profit = operating profit - interest expenses - taxes.
Assume the company says:
Operating Profit AED 35000
Interest Expenses = AED 3,000
Tax Expense = AED 2,000
Net Profit = AED 35,000 – AED 3,000 – AED 2,000
Net Profit= AED 30000
What is Net Profit Margin?
Net Profit Margin = (Net Profit / Sales) * 100
(AED 30,000 / AED 200,000) x 100 = 15%
After costs are deducted, the company makes a profit of AED 15 on every AED 100 of revenue.
Net profit is what business owners and investors use to judge the overall profitability and financial performance of a business.
But net profit is not necessarily cash that the company has in its bank account.
Worked Example: Calculating All 3 Profits
Example: A fictional online store in the UAE makes AED 500k in annual revenue. Here's how its profitability would vary with different levels of expenditure.
| Financials | Amount (Dirhams) |
| Sales Revenue | 500,000 |
| Cost of Sales | 300,000 |
| Gross Profit | 200,000 |
| Operating Expenses | 120,000 |
| Operating Profit | 80,000 |
| Interest Expenses | 10,000 |
| Tax Expense illustration | 5,000 |
| Net Profit | 65,000 |
The profit margins are as follows:
- Gross Margin: 40%
- Operating Profit Margin: 16%
- Net Profit Margin: 13%
Look at the difference.
The store makes AED 500k in sales, only AED 65k of which is net profit.
This is why revenue alone cannot be the measure of financial success.
Gross Profit vs Operating Profit vs Net Profit: what's the difference?
| Key difference: every profit metric measures profitability after having deducted a different set of business expenses. |
| Metric | What It Measures | Costs Covered | Best For |
| Gross Profit | Profitability of the products and services that are sold. | Cost of Goods Sold (COGS) | Pricing and production efficiency |
| Operating Profit | Profitability of core operations | Cost of goods sold and operating expenses | Operational efficiency |
| Net Earnings | General business profitability | All expenses including interest & taxes | Financial performance and investment choices |
Common Mistakes You Should Avoid
| Quick fact: Getting the expense classification wrong can make a profitable business look unprofitable and vice versa. |
1. Mixing revenue and gross profit
Revenue represents total sales. Gross profit is calculated only after COGS has been deducted.
2. Overlooking indirect costs
Depreciation, admin salaries and utilities are all excluded so as to inflate operating profit.
3. Only focusing on profit amount
It means absolutely nothing without knowing what the revenue figure needs to be in order to produce AED 100,000 profit.
4. VAT treated as business income
In general the VAT collected is not to be included in revenue for the purposes of working out profit for UAE businesses. The VAT collected on behalf of the government is not business income.
Conclusion
UAE companies can see exactly where their revenue is going by looking at gross, operating and net profit.
Gross profit is a measure of the profitability of the products. Operating profit is a measure of the day to day business performance. The bottom line is net profit.
By regularly reviewing all three you'll be much better at spotting cost increases, you'll be able to adjust your pricing and you'll be in a much better position to make financial decisions.
FAQs
- Can a company sell a lot and yet make very little?
Yes and it happens all the time. A company can have sales of AED 500,000 and that doesn’t necessarily mean it's making any good money. A large proportion of that revenue will be used up to pay its suppliers, its salaries, its rent and all the other various expenses. That's why it's just as important to look at net profit as it is to look at sales.
- What would be a good gross profit margin for a business in the UAE?
There's no single percentage that will work for every business. A retail shop might be running at 20% gross margin and a service business might have a far higher gross margin. Pricing and direct costs will vary depending on the sector. It does give you a much better idea of where your margins stand in comparison to others in the industry.
- Why is my gross profit continually going up but my net profit is continually going down?
Your products may be selling a treat but there's something else that's costing you more money. Your office rent might be up, you may have taken on more staff or you could be paying more interest on your loans. Look at your operating costs and your cost of financing and that's where the difference will be.
- How often is it necessary for a business to work out gross, operating and net profit?
Monthly is the place to start. If you wait until the end of the financial year you could well be missing problems that were flagged months previously. Your regular profit calculations will show you supplier cost increases, unnecessary expenditure or margin erosion. A small business can certainly benefit from looking at these figures on a monthly basis.
