The Short Answer
When you file personal bankruptcy as a business owner in North Carolina, you'll need to provide two core financial statements: an income statement (profit and loss) and a balance sheet. The income statement shows your revenue, expenses, and whether the business is profitable or operating at a loss. The balance sheet captures your assets, liabilities, and shareholder equity — which represents the actual value of the business. That equity figure matters directly in your bankruptcy case, because it's what may need to be protected through exemptions.
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 either of these 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.
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.
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.
Key Takeaways
- Revenue minus Cost of Goods Sold equals Gross Margin, which is what your business has left to cover operating expenses like payroll, rent, and advertising.
- Operating Profit or Loss is calculated by subtracting total operating expenses from Gross Margin — for a small business like the plumbing example, that number tells the trustee whether the business is viable.
- The balance sheet divides assets and liabilities into short-term (current) and long-term categories, and the difference between total assets and total liabilities equals shareholder equity.
- Shareholder equity is the figure that represents the value of your business in a bankruptcy filing — and it's the amount you may need to exempt or account for.
- Depreciation reduces the book value of fixed assets like equipment over time, which can significantly affect what your balance sheet shows as the business's total asset value.
- You should work with an accountant or accounting software to prepare accurate financial statements before filing — errors or missing documents can delay your case or create problems with the trustee.
Attorney Insight
The mistake I see most often with small business owners filing bankruptcy is coming in with no financial statements at all — or with records so incomplete that we can't accurately determine what the business is worth. That shareholder equity number on the balance sheet isn't just an accounting exercise; the trustee will use it to evaluate whether there are non-exempt business assets that could be liquidated to pay creditors. In North Carolina, your personal exemptions — including the $35,000 homestead exemption and wildcard exemption — apply to you as an individual, not to the business itself, so business equity often has no clean shelter. Getting your books in order before you file isn't optional; it's the difference between a smooth case and a very uncomfortable 341 meeting.
