As previously discussed, there are two financial statements that you must provide for your business when you file personal bankruptcy: the income statement or profit and loss and the balance sheet. We will look at the financial statements for a small plumbing business, ABC Plumbing. We encourage you to click on the blue links to open examples of a profit & loss statement and balance sheet. This is a simplified approach to the financial statements, so you should seek advice from your accountant should you have questions when preparing the financial statements for your business. We will also only be looking at Operating Income and will not consider interest income, interest expense or other non-operating items that most businesses incur.
Profit & Loss / Income Statement
The major components for the Income Statement are Revenue, Expenses and the Income or Loss of the business. Since each business is different, your individual components may vary.
Revenue is the money you receive from your customers for work provided or services you have rendered. In our example, ABC Plumbing had Revenue of $12,888 in October. In order to produce this level of Revenue, ABC Plumbing had to purchase items to install for their customers including toilets and facets. These items are the Cost of Goods Sold. ABC Plumbing spent $7,900 in October on Cost of Goods Sold. Revenue less Cost of Goods Sold is Gross Income or Gross Margin. This is the amount you have to cover the Operating Expenses.
Another major component of the Income Statement is Expense. Expenses vary by business but include items such as payroll, offices supplies, office lease and advertising. These are considered operating expenses since they are needed to conduct the business. This does not include the cost of machinery or business equipment, since they are usually considered capital purchases and will be discussed later.
Operating Profit or Loss is derived from subtracting Expenses from Goss Margin. The Operating Profit for ABC Plumbing is $2603 in October.
Balance Sheet
As discussed in a previous blog, the Balance Sheet is arguably the most important but overlooked financial statement, since it reflects the value of the business. The major components of the Balance Sheet include the Assets, Liabilities, and Shareholders Equity.
Assets are usually considered Short-Term (Current) or Long-Term. Short-Term Assets are cash and those assets that can be converted to cash within 1 year. In addition to cash, this would include certificate of deposits that renew within one year, accounts receivable from customers and inventory. Long-Term Assets are those you expect to keep for more than a year. Most often this is Fixed Assets including Machinery and Equipments, Furniture, and Computers less the depreciation on the assets. In the example of ABC Plumbing, the Fixed Assets were purchased some time ago and were fully depreciated. Depreciation is an accounting method that reduces the value of an asset over a period of time and is based on general accounting principles and tax guidelines.
Liabilities are also categorized as Short-Term (Current) or Long-Term. Current Liabilities are expected to be paid off within a year and can be credit cards or short-term loans. Long-Term Liabilities will take greater than a year to pay off and may include bank loans or personal loans for the business.
Shareholder Equity equates to the value of the business. Total Assets less Total Liabilities will equal Shareholder Equity. Shareholder Equity includes the owner’s initial investment in the business, profit or loss since the inception of the business and any owner’s withdrawals or payouts from the business. Shareholder equity is ultimately the amount that must be protected or exempted in the bankruptcy.
This is a very simplified approach to the financial statements. It is suggested that you seek the advice of an accountant or use an accounting software to prepare your business’ financial statements.
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