The Short Answer
If you own a business or are self-employed and filing personal bankruptcy, you'll need to provide two core financial statements: a profit and loss statement and a balance sheet. The profit and loss shows how your business has performed over time — for bankruptcy purposes, we typically need one for each of the six months before you file, plus a current year-to-date statement. The balance sheet shows the value of the business at a specific point in time and helps determine what — if anything — the business is worth to creditors. These documents aren't optional; the bankruptcy court and trustee require them to assess your business's profitability and equity.
If you are self-employed or own your own business, you should prepare monthly financial statements to understand how your business is performing. Realistically, financial statements are often the last thing a small business owner worries about. He or she is usually more concerned about how to make the next sale or generate the next contract. However, when an individual files bankruptcy, the financial statements of the business are required to determine the profitability of the business as well as the value of the business.
For our purposes, there are two basic financial statements for your business that will be required when you file personal bankruptcy: a profit and loss and a balance sheet.
The profit and loss reflects the profitability of the business over a period of time. It takes into consideration the business’s income, expenses and the resulting profit or loss. The period of time could be weekly, monthly, quarterly, annually, etc. For the bankruptcy, we will want the profit and loss for each of the six months prior to filing bankruptcy as well as a current period year-to-date. For example, if you are filing bankruptcy in April 2011, you would need the profit and loss statements for October, November, and December 2010 as well as January, February and March 2011. In addition, an April 2011 year-to-date profit and loss would also be required. We will look at the component of a profit and loss in more detail in another blog post.
The balance sheet reflects the value of the company at a point in time. It is usually considered the most important financial statement for the business, but oddly enough, it is often overlooked by everyone except for your accountant and banker. The balance sheet takes into consideration the profit or loss for the company as well as the assets and liabilities for the company. A balance sheet is sometimes referred to as the thermometer of the business, since you can use it to check the business’ “temperature” to determine if it is “healthy – 98.6” or “sick – 102.” The balance sheet reflects the true value of the business at a point in time, such as March 30, 2011. If on March 30, 2011 your business has a value of $10,000, you should be able to sell the business for $10,000 if you have a willing and able buyer. We will look at the components of a balance sheet in another blog post.
Preparing and understanding the financial statements for your business can be an overwhelming task. Many small businesses purchase accounting software to help them prepare the financial statement or they may hire an accountant to assist the business owners. Let’s look at a simplified version in the blog post, The Basics of Understanding Financial Statements for Your Business.
Key Takeaways
- Two financial statements are required when a business owner files personal bankruptcy: a profit and loss statement and a balance sheet.
- The profit and loss must cover each of the six months prior to your filing date, plus a current year-to-date period.
- The balance sheet captures the value of your business at a single point in time and reflects its assets, liabilities, and net worth.
- A balance sheet showing $10,000 in business equity, for example, means the trustee may treat that value as an asset in your bankruptcy case.
- Accounting software or a hired accountant can help you prepare these statements accurately — errors or missing records can delay your case or raise trustee concerns.
- Self-employed filers who don't track their finances regularly often face the biggest hurdles, making it critical to gather this information early in the process.
Attorney Insight
The mistake I see most often is a self-employed filer showing up with no financial records at all — just a bank account they've been running everything through. That forces us to reconstruct months of income and expenses from raw statements, which delays filing and can make the profit and loss look messier than the actual business performance. The trustee will scrutinize these numbers closely, especially if the business generates significant cash income, so a clean and accurate profit and loss isn't just paperwork — it's protection. If your records aren't in order, getting with a bookkeeper or accountant before you call us will save everyone time and reduce the chance of complications at your 341 meeting.
