Annual accounts: balance sheet, income statement and notes explained

Every year, after the close of your financial period, you sign a document many directors only skim over: the annual accounts. It is not just one more administrative formality. It is the official snapshot of your business, the one your bank will read for a loan, a potential buyer, the tax authorities, and sometimes your fellow shareholders in case of disagreement. Misunderstood, it deprives you of a management tool. Poorly prepared, it exposes you.

This article walks through the three documents that make up the annual accounts, explains what each one tells you, who must produce them, and above all what we look at first in the files we take over.

A company's annual accounts comprise three documents that form an indivisible whole: the balance sheet (the assets and liabilities at a given date), the income statement (the performance of the period) and the notes (the explanations that make the first two readable). This indivisibility is set out in Article L123-12, third paragraph, of the French Commercial Code. Every commercial legal entity must prepare them at the close of each financial period.

The annual accounts are the summary financial statements drawn up at the end of each accounting period, most often on 31 December, although the date depends on the closing date chosen in your articles of association. They translate the company's activity and situation over a twelve-month period into figures.

The law is precise on this point. Article L123-12 of the Commercial Code requires every natural or legal person having the status of trader to verify by inventory the existence and value of its assets and liabilities, then to prepare annual accounts at the close of the period. Its third paragraph adds that these annual accounts comprise the balance sheet, the income statement and notes, which form an indivisible whole.

This notion of an indivisible whole is not decorative. It means that a balance sheet presented alone, without its income statement or notes, does not constitute annual accounts in the legal sense. This is a common mistake: a director sends a balance sheet to the bank thinking the accounts have been provided, when half the information is missing.

The detail of what each of these three documents contains is set out by Article L123-13 of the Commercial Code. The two articles must therefore be read together: L123-12 establishes the obligation and the indivisibility, while L123-13 describes the content.

The balance sheet is a snapshot of the company's assets and liabilities at a precise date, the closing date. It is read in two columns that always balance.

On the left, the assets: what the company owns and uses. These include fixed assets (premises, equipment, goodwill, software), inventory, trade receivables and available cash.

On the right, the liabilities: the source of the resources that financed those assets. Equity (capital, reserves, profit), provisions, financial debt, trade payables and tax and social liabilities.

The fundamental logic fits in one sentence: everything the company holds was financed by someone, either the shareholder or a creditor. This is why total assets always equal total liabilities.

To go further on reading this document, see our dedicated article on how to read and interpret a balance sheet.

Where the balance sheet is a photograph, the income statement is a film. It traces all income and expenses recorded over the twelve months of the period and produces the result: a profit if income prevails, a loss otherwise.

It breaks down into three levels you should learn to distinguish:

• operating result, the core business, which measures the performance of the actual activity;
• financial result, which isolates interest, bank charges and investment income;
• exceptional result, which groups what is not meant to recur (sale of an asset, penalty, exceptional grant).

Our view: a director should always look at the operating result before the net result. A flattering net profit can hide a loss-making business saved by the sale of premises. Conversely, a one-off net loss can conceal a perfectly healthy activity.

The notes complete and comment on the balance sheet and the income statement. They provide the reading keys that the raw figures do not give: valuation methods used, depreciation rules, details of provisions, off-balance-sheet commitments, events after the closing date.

This is the document directors read least, and the one analysts read first. When we take over a file for a sale or a financing request, the grey areas often sit in the notes: an underestimated provision, an unmentioned guarantee commitment, a dispute passed over in silence.

The underestimated risk#

Poor or purely formal notes are not neutral. They reduce the confidence of a banker or a buyer, who reads the absence of information as a signal. And in case of an audit, the tax authorities rely on the notes to understand your accounting choices. Well-prepared notes are not a chore: they are a credibility tool.

The obligation falls on every commercial legal entity: SAS, SASU, SARL, EURL, SA, SNC, as well as on individual traders under the actual regime. Civil companies such as an SCI are also bound in most situations, in particular when they are subject to corporate income tax or exceed certain thresholds.

Micro regimes (micro-entrepreneur, micro-BIC, micro-BNC) are exempt: they fall under lightened accounting obligations, with no formalised balance sheet or income statement. This is one of the structuring differences to weigh when choosing your regime.

Not everyone prepares notes of the same depth. The Commercial Code adjusts the obligations according to size thresholds. The figures below correspond to the thresholds in force in spring 2026; they should be checked at the time of your closing, as they change.

Quick decision by size#

Be careful when reading these thresholds. The test is whether the company exceeds two of the three criteria, and the crossing is confirmed over two consecutive periods. Sustained growth can therefore move you from one category to another from one year to the next, which makes presentation heavier and sometimes triggers other obligations, such as the appointment of a statutory auditor.

Preparing the annual accounts is only one step. Next come their approval, then their filing. Here is the typical sequence for a commercial company, subject to your articles of association and legal form.

1. Close of the period and inventory of assets and liabilities.
2. Preparation of the annual accounts (balance sheet, income statement, notes).
3. Preparation of the tax return package, the income declaration sent to the tax authorities.
4. Approval of the accounts by the shareholders, within six months of the close for most commercial companies (to be checked by legal form).
5. Filing of the accounts with the registry of the commercial court, in principle within one month of approval, extended to two months in case of electronic filing (to be checked).

One point of attention: the tax return package and the annual accounts are not the same thing. The package is intended for the tax authorities and follows a tax-calculation logic; the annual accounts are intended for the registry and third parties. They share the same base figures but serve distinct purposes.

In the financing-request files we take over, the most ordinary blocker is not a bad result: it is an incomplete file. A director sends the bank a balance sheet and an income statement, with no notes, thinking the essentials are there. The banker, however, expects complete annual accounts. The file review falls behind, the image conveyed is one of loose management, and the negotiation starts badly.

The lesson is simple: always send the three documents together. They form an indivisible whole, both literally and in the sense of the Commercial Code.

When we close accounts, beyond compliance, we check three things that make the difference:

• the consistency between the operating result and the reality perceived by the director, to detect a matching error or poorly valued inventory;
• the quality of the notes, because they determine how readable the accounts are to third parties;
• anticipation of size thresholds and their consequences, in particular the statutory-auditor obligation, which is best prepared in advance.

This is the very purpose of a bookkeeping and review engagement: producing accounts that are accurate, but also accounts that are useful for decision-making. Preparing year-end well also means working on preparing the closing of the period ahead of time rather than in a rush.

• The three documents are present: balance sheet, income statement, notes.
• Total assets equal total liabilities to the cent.
• The result in the income statement matches the result carried in the liabilities of the balance sheet.
• The notes mention off-balance-sheet commitments and subsequent events.
• Size thresholds have been checked for the period and the previous one.
• The approval and filing calendar is set.