Every state bar association requires that an attorney reconcile their trust bank statement to their clients’ individual balances either monthly or quarterly. This reconciliation process is one of the more important rules in three-way trust account management. It’s also one of the rules that attorneys most often overlook, often resulting in unfortunate consequences.
To prevent you from making mistakes that could cost you your firm, we’ve laid out in easy steps the ins and outs of three-way trust reconciliation for lawyers.
There are three main components to the reconciliation process:
The Trust Ledger
This is a summary of all the transactions into and out of a trust account.
The Client Ledger
This is a summary of all the transactions associated with a specific client.
The Trust Bank Statement
This is a record generated by the bank holding the trust account.
Both the trust ledger and the client ledgers should be maintained by a firm’s internal record keeping system, and their balances should always match. Moreover, to comply with state bar regulations, the trust bank statement must be reconciled with the client ledgers and the trust ledger on a quarterly, or even monthly, basis.
Once you’re ready to begin the three way reconciliation process, follow these three steps:
1. Reconcile Your Account to Bank Statement
Your bank’s statements should be your starting point, as their numbers are reliable, accurate, and usually up to date. However, you may have to make some adjustments. If you have any deposits made after the statement closing date, add them to the balance shown on the bank statement. Likewise, if you made any withdrawals made after the statement closing date, subtract them from the balance shown on the bank statement.
2. Compare Your Records to Reconciled Trust Account Statement
What makes this process more complicated is the fact that, at times, the balance on the trust bank statement will need to be adjusted before reconciliation can begin. Oftentimes there will be transactions that have occurred but that have not yet cleared the trust bank account, and so a lawyer will need to alter the end balance on the trust bank statement to account for these missing transactions.
3. Reconcile Trust Account Statement with Client Ledgers
At the end of every quarter, most state bar associations require that each client ledger’s balance must be totaled and reconciled with the bank statement balance for the respective trust account. This process can be made more complicated by the fact that the balance on the trust account bank statement may need to be adjusted before the reconciliation can even begin. Also, some transactions may need several days to process. For example, a client’s check from the end of the month may not have been deposited immediately. In this case, the check would be recorded in your client ledger but would not yet show up on the trust account bank statement.
In the end, the important thing to remember is that a proper three-way reconciliation results in your trust ledger, client ledger, and trust bank statement all showing identical numbers. While these three steps may make the reconciliation sound straightforward, many attorneys fail to perform these steps on a regular basis. In fact, in many states, the bar only requires that law firms perform a three-way reconciliation every quarter.
While your state bar may accept a simpler two-way reconciliation between the trust ledger and the bank account statement month-to-month, Legal Ease Bookkeeping recommends that you fully reconcile every month. After all, the goal of three-way trust reconciliation is to track and match all activities coming into and out of the trust bank account. With the proper processes in place, law practice three-way trust reconciliations won’t require extra time, but will prevent a great deal of stress for your firm!
