If you’re running a business, filing bankruptcy involves preparing a profit and loss statement. While this subject isn’t terribly interesting or sexy, it’s critically important to preparing accurate information for your bankruptcy lawyer.
What’s a Profit & Loss Statement?
Relax! This isn’t algebra or calculus. This is simply a statement showing income in and expenses out for a specific period of time. And for bankruptcy purposes, we focus on a month-by-month time frame. It shows whether you’re making money or losing it. This is important for your bankruptcy, and it’s important for you to understand for life after bankruptcy.
Despite fancy finance terms we hear tossed around, business is about one thing: taking in more money than you spend. If you do that, you make a profit. If you don’t, you have a loss. And it doesn’t matter if you’re running a small mechanical company in East Nowhere, U.S.A. or you’re running Ford, Wells Fargo, or Coca Cola. You take in more than you spend, that’s good. You spend more than you take in, that’s bad.
We’ve spend a lot of time here in Bankruptcy Law Network explaining the documents you must assemble prior to filing bankruptcy and the—sometimes silly—reasons why.
Consumer bankruptcy starts with CMI—“current monthly income.” Like I’ve said, this isn’t really current monthly income, but an average of the income for the six months prior to the month in which you file bankruptcy. So if you file in July, we need to know your income from January through June, broken down month by month.
If you have a job and get paid as an employee, we use pay stubs to figure this out. If you are self-employed, you guessed it, that’s where the profit and loss statements come in.
A typical profit and loss statement might look something like this:
1. Gross Receipts or Sales $
2. Cost of Goods Sold $
3. Gross Profits (Subtract line 2 from line 1) $
4. Other Income $
5. Gross Income (Add lines 3 and 4) $
6. Business Property Rent/Lease $
7. Salaries and Wages $ (note that if you pay yourself wages–like in a sub-chapter S corporation–you need to provide your pay stubs to your attorney)
8. Employee Benefits $
9. Equipment Lease Payments $
10. Interest Payments $
11. Supplies $
12. Utilities $
13. Telephone $
14. Repairs and Maintenance $
15. Advertising $
16. Professional Fees
A. Liability $_________
B. Property $_________
C. Vehicle $_________
D. Worker’s Compensation $_________
E. Other $_________ $
A. Payroll $_________
B. Sales $_________
C. Other $_________ $
19. Total Expenses (Add lines 6 through 18) $
Net Income $ or (loss)–Subtract line 19 from line 5 to get this number. This is sometimes referred to as “the bottom line.”
These “accounts” or categories of income and expense will vary from business to business. But regardless of the business you’re in, you have income and you have expenses. It’s that simple.
Some other important points
First, some business are “cash basis” and some “accrual.” Regardless of whether you are on an accrual system, for bankruptcy purposes these reports need to be run on a cash basis. (Accrual accounting counts income invoiced even if it’s not received, and this is not relevant for determining your income under the Bankruptcy Code, so everything we need to do for bankruptcy purposes must be on a cash basis.)
Second, draws or distributions to owners–shareholders, members, or proprietors–are not expenses! If you take in $10,000, have $5,000 in expenses, and take a $5,000 “draw” or “owners distribution,” you have $5,000 in profit, not zero.
Third, if you can’t figure out how to do your profit and loss statements, call an accountant or experienced bookkeeper who can help you. As with all information provided to your bankruptcy lawyer, the information must be accurate.
This Is Important for Bankruptcy and for Your Life After Bankruptcy!
As my good friend Atlanta CPA Glenn Aldridge says: “Taking control of your money begins with taking responsibility for it. That means knowing how much you have, where it’s coming from, where it’s going, and what it’s doing in the meantime. A properly prepared profit and loss statement will answer most of those questions.”
Post script (some technical stuff). As Glenn pointed out to me, the term “profit and loss statement” actually applies to accrual accounting, not cash accounting. In cash based accounting, the report is called a “Statement of Cash Receipts and Cash Disbursements” and the “bottom line” would be referred to as either the Excess or (Deficiency) of Cash Receipts over Cash Disbursements. However, most accounting software simply calls the reports “profit and loss statements,” so I’ll use that term to keep things simple.
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Last modified: November 3, 2010