Get your Small Business Accounting Tax-Ready for 2026
Updated: Oct 15
By: Sonia Lee Ng, CPA
Date Updated: August 7, 2026
Introduction
In this article we summarize accounting aspects that small businesses should consider getting the accounting records ready for year 2026 tax preparation.
Bookkeeping
Proper bookkeeping throughout the year helps business owners identify deductible expenses, monitor financial performance, and prepare accurate tax returns. Before year-end, business owners should:
Reconcile business bank accounts and credit cards through year-end/December 31. This will ensure all transactions appearing on bank and credit cards are included in the accounting records.
Income and Revenues: This includes reviewing all business income to make sure they are recorded. Income may have been collected as cash, checks, electronic payments, credit card sales, and payments received through platforms such as PayPal, Stripe, Square, or online marketplaces.
Review and properly classify expenses: Ensure that all expense transactions are properly classified accordingly. Please refer to our publication about Business Expenses and Deductions.
Separate personal expenses from business transactions: It is very important to segregate personal expenses to avoid having those transactions being deducted as business expenses.
Maintain supporting documentation: such as receipts, invoices and mileage records.
Review and reconcile prepaid expenses as applicable: Review prepaid expenses, such as insurance, rent, subscriptions, and maintenance contracts, to ensure they are properly recorded and classified. Verify supporting invoices, contracts, payment dates, and coverage periods; update prepaid expense schedules; and record necessary adjusting entries to recognize expenses in the appropriate accounting periods. Identify expired or fully utilized prepayments, reconcile remaining balances to the General Ledger, and review their treatment under applicable tax laws and rules to ensure accurate financial reporting and tax preparation.
Review and reconcile unearned revenue as applicable: Review customer deposits, advance payments, prepaid subscriptions from customers, and other amounts received for goods or services not yet delivered. Verify supporting invoices, customer agreements, payment records, and service periods to ensure transactions are properly recorded and classified. Identify amounts earned during the year, record the necessary adjusting entries to recognize revenue in the appropriate accounting periods, and reconcile remaining unearned revenue balances to the general ledger. Review applicable tax treatment, as advance payments may be taxable before revenue is recognized for financial purposes.
Accounts Receivables from customers and related parties: Review accounts receivable from customers to ensure outstanding balances are accurate, properly classified, and supported by documentation. Evaluate the collectibility of outstanding receivables and identify potential bad debts. For related-party receivables, review supporting agreements, loan terms, interest charges, and repayments to distinguish legitimate loans from advances, distributions, or other transactions. Reconcile subsidiary records to the general ledger, record necessary adjusting entries, and review the applicable tax treatment to ensure accurate financial reporting and tax preparation.
Property, Plant, and Equipment: Identify equipment purchases and other capital expenditures. Document purchase dates and dates placed in service, document asset disposals and capital improvements made during the year. Include property in depreciation schedules accordingly update and calculate depreciation per books and taxes. Record the appropriate depreciation in the accounting records.
Inventory: Perform a year-end physical inventory count and reconcile quantities with accounting records. Investigate discrepancies, including missing, damaged, obsolete, or unsalable inventory, and document necessary adjustments. Verify purchases and related costs, review year-end transaction cutoff, and ensure inventory is consistently valued using the business's adopted accounting method (e.g., FIFO or LIFO). Reconcile inventory balances to the General Ledger and correct any discrepancies.
Cost of Goods Sold: Verify that inventory purchases, beginning and ending inventory balances, and other applicable costs are properly classified to support the calculation of cost of goods sold.
Accounts Payable: Review the Accounts Payable Aging Report at Year-End or December 31, to identify outstanding vendor balances, overdue invoices, unusual balances, and potential discrepancies. Verify unpaid invoices against vendor statements and supporting records, investigate missing or duplicate invoices, unapplied payments, and vendor credits, and review payments made after year-end to ensure liabilities and related transactions are accurately recorded in the appropriate accounting period.
Review payroll liabilities and contractor payment: Reconcile payroll expenses, payroll liabilities and Forms W-2 with payroll records.
Sales Tax Payable: Reconcile taxes collected, reported and remitted by verifying against sales tax forms and other supporting documents..
Collect Forms W-9 during the year before hiring a vendor or contractor to determine information return filing requirements.
Reconcile business loans and outstanding balances, including review of amortization of interest and principal.
Owner's Equity and Distributions: Distinguish contributions, draws, distributions, and business expenses.
Review financial statements for unusual or missing transactions. Profit and Loss Statement and the Balance Sheet. Review unusual balances, negative accounts, unexplained liabilities, substantial changes from previous years, and transactions requiring reclassifications.
Common Accounting Mistakes to Avoid
Look for these mistakes that might affect financial reporting and tax figures.
Recording loan proceeds as income.
Categorizing the entire loan payment as an expense instead of amortizing principal and interest.
Failing to reconcile business bank and credit cards.
Recording personal expenses as business expenses.
Recording transfers between business accounts as income or expenses.
Recording equipment and other capital expenditures as ordinary operating expenses without reviewing their proper accounting treatment.
Failing to account for credit card processing fees or incorrectly recording net deposits as gross sales.
Overlooking outstanding liabilities, payroll taxes, or transactions that require year-end adjustments.
Disclaimer
The information provided is for general informational purposes only and does not constitute professional tax, legal, or accounting advice. Tax laws and regulations are complex and subject to interpretation, and their application can vary based on individual circumstances. Always consult a qualified tax professional or advisor to discuss your specific situation before making any tax-related decisions. Neither the author nor the platform assumes any liability for errors, omissions, or for any outcomes related to the use of this information.
Accurate accounting records are essential for reliable financial reporting and efficient tax preparation. Reviewing and organizing your records throughout the year can help identify errors, reduce last-minute corrections, and support informed decisions. If you need help with your accounting to get your financials ready for tax preparation, click below
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