Bank reconciliation is comparing what your books say your bank balance is against what the bank actually shows. Any difference needs an explanation.
The basic process
Start with your bank statement closing balance. Add any deposits you recorded in your books that have not yet cleared the bank. Subtract any cheques you issued that have not yet been presented. The result should match your book balance.
Common reconciling items
Outstanding cheques are cheques you wrote but the recipient has not deposited yet. Deposits in transit are payments you received and recorded but the bank has not posted. Bank charges you did not record in your books are another common gap.
What to do when they do not match
Go line by line. Compare every debit and credit in your books against the bank statement. Mark matched items. Anything left unmarked on either side is a discrepancy. The most common causes are recording errors, missed bank charges, and transactions recorded in the wrong month.
How often to reconcile
Monthly is the minimum for businesses. Weekly works better for accounts with high transaction volumes. Reconciling once a year makes the process much harder and riskier.
Related reading: Understanding Bank Charges on Your Statement, How to Prepare Bank Statements for Your CA, How to Track Expenses Using Your Bank Statement.