At the end of the month, you get your bank statement. You look at its ending balance, then you look at the cash balance in your own records. They almost never match. It’s not necessarily a sign that something is wrong. More often, it's just a matter of timing and information.

The items that cause this difference are called reconciling items. Finding them is like a detective game. Your job is to identify every transaction that one party has recorded but the other hasn't, laying the groundwork to make the two balances agree.

The most common reason your books and the bank's records don't align is timing. Some transactions are known to you before the bank processes them, and vice versa. These aren't errors, just temporary discrepancies that will resolve themselves over time.

Two major timing-related items are deposits in transit and outstanding checks.

For example, imagine you take a customer's check to the bank's night depository at 6 PM on June 30th. You record the deposit in your cash ledger for June. However, the bank won't process that deposit until the next business day, July 1st. So, your June bank statement won't show it. This is a deposit in transit.

Let's say you write and mail a check to a supplier for $250 on March 28th. You immediately deduct $250 from your cash balance in your records. Your supplier might not receive the check for a few days, and they might wait another week to deposit it. Until that check is presented to your bank and paid, it's an outstanding check. It has been deducted from your books, but not yet from your bank account.

Some items appear on your bank statement before you've had a chance to record them in your books. Typically, you only find out about these when you review the statement. These include bank fees and any interest earned.

Bank Fees: Banks often charge for their services. This could be a monthly maintenance fee, a fee for printing checks, or a charge for a wire transfer. The bank automatically deducts these fees from your account. If the bank charged a $15 service fee for the month, your bank balance is $15 lower, but your books won't reflect this until you see the statement and record the expense.

Interest Income: If you have an interest-bearing checking account, the bank will deposit interest directly into it. This increases your bank balance. For example, the bank might pay $5 in interest. This is good news, but it's another transaction you need to add to your own cash records to show the increase.

Finally, we have errors. While less common than timing differences, mistakes can be made by either the company or the bank. Identifying them is a key goal of reconciliation.

A company error might happen if you write a check for $45.90 but accidentally record it in your cash ledger as $49.50. Your records would show $3.60 less cash than they should. An error could also be an omission, like forgetting to record a cash withdrawal from an ATM.

A bank error is a mistake made by the bank. For instance, they might deposit a check intended for another customer into your account. Or they might clear a check for the wrong amount. These are rarer today thanks to automation, but they can happen. If you find a bank error, you must contact the bank to have it corrected.

Recognizing these different types of reconciling items is the crucial first step. Once you've identified them, you're ready to use them to make your records and the bank's records agree.