LAW FIRMS: 3-Way Reconciliation Of Trust Account

As a Law Firm, you manage clients’ funds and need to follow specific state rules about how to handle those and the process and reports you need to follow to guarantee the correct management of clients’ funds. These reports are a requirement of the American Bar Association and are a must for any law firm with trust funds.

After your monthly bookkeeping and before issuing any report, you must perform a monthly 3-way reconciliation to ensure the amounts in the bank and in your books are correct.

A 3-way reconciliation balances three reports: your internal books, your trust account bank statement, and the client ledger. If you don’t know how to complete this task, below we describe the correct steps you need to follow:

Step 1: Calculate your current available bank balance with the bank statement

The bank statement only has the transactions the bank already processed but there are additional transactions that affect your current available balance. To calculate it complete the following steps:

• Take the ending balance from the bank statement
• Add deposits-in-transit
• Subtract outstanding checks. (Only those checks that have been issued but which are not shown on the bank statement.)
• Don’t forget to also check your prior month’s reconciliation and make sure any deposits in transit or checks in transit hit the bank this month. If not, you need to add those even when those were from the previous month.
• The result is your available balance.

Step 2: Compare your available balance (Step 1) against your books records.

• Print/download a Trust Bank Account Detail report from your accounting software. This report shows the initial balance and all the transactions affecting your account: deposits, disbursements, fees, etc.
• The ending balance should match the available balance you calculated on Step 1. If they don’t match, you should check each transaction recorded in your books against each transaction recorded in the bank statement to find any discrepancies.

Step 3: Compare the ending balance from Step 1 and Step 2 against the client’s ledgers.

• Print/download the Trust Listing Report from the Legal Software (the name of the report may vary depending on the software)
• The sum of all client’s ledgers balances should match the balances from Step 1 or Step 2.

Note: make sure to consider any interest payable that has not been withdrawn from the trust account to calculate the balances.

When you have completed the 3-way reconciliation, all three numbers should be equal and you can print/download this reconciliation for your records.

In case any of the numbers are not the same, there are many variables or mistakes that you could take into account and recheck to make sure your three-way is correct. In our post 8 Common Mistakes when handling a Trust Account you can check some of them.

It is important to mention that you need to know if the IOLTA reporting is required monthly or quarterly. If you are in California you can check The State Bar of California website for more information.

Our biggest asset is your Trust. If you need assistance with your Trust Account, don’t hesitate to set up an introductory meeting with our experts to discuss how My Books and Taxes can help you and your business.