Financial statements and key terms: P&L, balance sheet, and the net cascade

One-line orientation

A profit and loss statement shows performance over a period. A balance sheet shows what the firm owns and owes on one date. Learn those two time frames before the revenue terms.

Key points

• Profit and Loss Statement (P&L / Income Statement):
  • Shows revenue and expenses over a specific period (month, quarter, fiscal year).
  • Purpose: measure firm performance and profitability.
  • The P&L provides accounting figures used to calculate management indicators such as utilization, overhead, break-even rate, and net multiplier. Those indicators are not necessarily line items on the statement.
• Balance Sheet:
  • Snapshot of the firm’s financial position at a single point in time.
  • Components: Assets, Liabilities, Equity.
  • Equity equation: Equity = Assets − Liabilities.
• The “net” cascade (key definitions):
  • Gross fee / billing: the client-facing amount before pass-through costs are stripped out.
  • Net operating revenue (NOR): firm accounting generally moves from gross revenue to NOR after consultant fees and reimbursable project expenses are removed. “Net billing” is not a required intermediate step.
  • Net Operating Revenue (NOR): the revenue the firm retains for its own operations after consultant and reimbursable pass-through costs are removed.
  • Net Profit: income after operating expenses.
  • Current / retained earnings: the amount remaining after taxes and distributions, depending on the statement and vocabulary being used.
• Supporting terms:
  • Assets: resources the firm owns, including cash and sellable items.
  • Liabilities: financial obligations and debts the firm owes.
  • Net profit margin on NOR: Net Profit ÷ Net Operating Revenue. Some study material calls this a Profit/Earnings Ratio, but standard finance vocabulary uses profit-margin language.

From gross billing to current earnings: three deductions

Schematic

The descending bars show the order of the cascade; their heights are illustrative, not dollar amounts.

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Terminology varies by accounting system. This figure follows the study card and source glossary; confirm the firm's chart of accounts before applying the labels in practice.

Confusions / comparison

	Profit & Loss Statement	Balance Sheet
What it shows	Revenue, expenses, profit/loss	Assets, liabilities, equity
Time frame	Over a period (month/quarter/year)	At a point in time (a specific date)
Key line items	Gross billing, NOR, net profit, retained/current earnings	Cash, receivables (assets); debts (liabilities); owner’s equity
Primary question answered	”How did we perform?"	"What do we own and owe right now?”
Accounting basis	Accrual (for operating accuracy)	Either; balance sheet reflects accrual positions

Related

→ pp-accounting-cash-vs-accrual: which accounting method feeds the P&L · pp-financial-ratios: ratios derived from balance-sheet figures (current ratio, quick ratio, debt-to-equity, ROE) · pp-firm-planning-tools: profit plan projects the P&L figures forward as a budget.