Step 2: Review Your Inventory and Fixed Assets

Most businesses have physical inventory and assets, so inventory management and fixed asset verification are a cornerstone to your year-end checklist. Let’s start by reviewing your inventory.

 Inventory Review:

This first part of step two will begin with a physical count of your inventory to verify the quantity and valuation. You should use a reliable accounting method for this process (i.e, First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or weighted average).

These calculations will directly influence your year-end balance sheet because they will ensure your inventory review reflects the true value of your assets. Conducting an inventory review is also critical to calculating your cost of goods sold accurately so you can properly determine your company’s gross profit.

Here are three steps to reviewing your inventory properly:

1. Complete a physical count of your inventory using a reliable and consistent accounting method (FIFO, LIFO, weighted average).
2. Identify any issues, such as damaged or obsolete inventory items, and record them for further review.
3. Document this process for 2026 to ensure that whatever accounting method you use, whether it is FIFO, LIFO, or weighted average, is used consistently in the future.

There are faster ways to complete these tasks, including using inventory management software or organizing “count teams” in which one person is counting inventory and another person is recording the data. If you don’t have time to purchase new software or assemble these counting teams, make note of these tips for 2026 so you can begin your planning of this step early.

Fixed Asset Review:

You will also want to complete a thorough review of your company’s fixed assets – any buildings, equipment, vehicles, and furniture. This step takes some time, as you will need to accurately record, classify, and depreciate these fixed assets.

You should start this second part of step two by completing the three steps below to ensure you are properly managing your fixed assets and avoiding any over- or understatements of these fixed items:

1. Complete a thorough review of your asset register for any assets no longer in service, anything removed or thrown away, or damaged items.
2. Calculate the depreciation accurately and record your end-of-year adjustments, if applicable.
3. Confirm any leases of equipment and other tangible items for both accounting and capitalization thresholds.

You want to take this step seriously so that your balance sheet accurately reflects your company’s inventory and asset reality. If not, you are risking an erroneous profit and loss statement, the wrong depreciation calculations, or other flawed inventory and fixed asset expenses for the year. Remember that these checks are meant to ensure your balance sheet reflects reality and that your profit and loss statement includes the right depreciation and inventory expense for the fiscal year.

Step 3: Complete Payroll and 1099s, Finalize Taxes and Begin Tax Preparation

Since the tax season officially begins in January, you need to start preparing beforehand to avoid delays, penalties, and other costly problems that may arise in the beginning of 2026. This means tackling your company’s tax responsibilities during your year-end accounting to ensure all required financial documents and statements are organized before your books close for the year.

You will need to ensure you are collecting and verifying all your company’s financial data for the year, including:

• Reconciling your payroll reports, including any wages, commissions, bonuses, benefits, and employer taxes. This includes a collection and preparation of W-2s and 1099 drafts.
• Collecting all W-9 forms so you can confirm your company’s contractor payments and fulfill your 1099 requirements early to prevent any unnecessary delays or penalties with the IRS.
• Calculating your income expenses and reviewing your complete set of financial statements so you can calculate current and deferred taxes.
• Reviewing sales and value-added taxes and income tax provisions so that your tax-related financial entries are supported by clear and accurate documentation and are free from any last-minute errors.

You will want to reconcile your current year financials so that any discrepancies are found and fixed immediately. That way, you have properly calculated accruals, depreciation, and tax provisions to make sure you are in compliance with IRS and state tax regulations, while also maximizing your deductions.

This critical step will also help you minimize the risks of an audit through organized, reconciled, and well-documented financial records. If you do get contacted for a state or federal audit, you will be well-prepared with easily accessible financial documents.

If your company has not already hired financial professionals who can complete these important year-end tasks, our qualified tax advisors collaborate with numerous clients to properly evaluate any uncertain tax issues, accurately recognize deferred tax items, and document your company’s justifications and reasonings for any tax-related issues.