My daughter is 3. She is having a hard time distinguishing between Jesus and Santa Claus at the moment. The fact that her own birthday is so close to Christmas does not help the confusion about birthdays any. We are doing what we can to explain things, but I admit to some nervousness. My husband assures me she is processing more than I realize, that it's nothing to worry about, and that because we do not treat Jesus the same way we treat Santa or the Tooth Fairy or her imaginary friend, all will be well and all manner of things will be well.
She likes to sing Happy Birthday, Jesus (I believe she learned to do that in preschool), but until she understands better who Jesus is, I feel anything like making a Jesus birthday cake would border too much on make believe. Once she knows who He is more, that would be a good symbolic thing to do, and I look forward to it. Right now, her favorite thing is the advent calendar. We turn over one picture a day--and I can tell her the story as we do so--there are camels, kings, shepherds, etc. underneath, and on the 25th is, of course, a picture of the baby Jesus. Of course, she keeps saying, "Jesus is going to come on Christmas? Jesus is going to come to our house!"