Mastering Three-Way Reconciliation for Trust Accounts

Completing three-way reconciliation is a requirement for attorneys to be in compliance with Rule 1.15 (d) (3).

You must complete this process monthly for every trust account the firm or attorney manages. The more trust accounts a firm manages, the more important it is that they do so accurately and promptly. 

On a basic level, reconciliation ensures an account balance is accurate by comparing it against other records. Some businesses do two-way reconciliation. However, a third set of records is the standard requirement in attorneys' cases. The goal of completing the trust account reconciliation process is to clear the transactions between the trust account records and bank statements.

Attorneys and firms complete three-way reconciliation for all accounts managed to catch mistakes. Additionally, it verifies that there has been no commingling of funds, which violates the rule. 

What Records Do You Need In Trust Account Reconciliation?

There are three types of records that attorneys should be keeping per Rule 1.15. 

• Trust Ledger: Also known as the account journal, it is a written journal for each trust account. This internal record includes which clients the firm has paid or received money for, details on payouts, and the new account balance after each transaction.
• Client Ledgers: These are written ledgers for each client's funds. This ledger lists all transactions together by the client and includes information such as the transaction date, purpose of payment, and transaction amount.
• Trust Account Bank Statement: This is a bank record regarding trust account deposits, charges, and withdrawals. It may also include interest accrued to the account. However, in the event of an IOLTA account, you should pay this interest to the state bar. 

Step-by-Step Guide to Completing the Three-Way Reconciliation Process

Here are the steps to completing the three-way reconciliation process from the bookkeepers at SmartBean®!

Step 1

Confirm that all deposits and cash flows coming into the bank are the same as the deposits listed in the trust ledger records.

If you have been keeping up with your records, these should have the same numbers since all transactions need recording in the client ledger and account journal.

Once you reconcile these two records against each other, you can mark them as cleared.

Step 2

Verify that the account journal containing the payment or disbursement records is correct. Similarly, all the cleared checks and withdrawal transactions from the bank statements should match the disbursements in the account journal.

Mark these records as cleared when the transactions on the bank statement match the cleared trust ledger and account journal. 

From here, you must enter the Corrected Month Ending Balances into the account journal and client ledger. 

Step 3

While completing the reconciliation, it may be necessary to note uncleared transactions by the bank. It isn't uncommon for recorded transactions in your trust account records to have yet to be cleared by the bank.

This can happen for several reasons.

Shipping delays or the payee taking a while to deposit the check aren’t necessarily a “problem,” but keep them in mind when the month ends and it's time to reconcile accounts.

In this instance, the protocol is to carry forward the uncleared amount in each reconciliation until the bank statements reflect the cleared transaction. 

However, it is still protocol to account for transactions that have not cleared within the month of reconciliation. With a list of uncleared transactions, firms must adjust the bank statement balance to reflect the pending transactions. To do this, adding any uncleared deposits and subtracting the uncleared disbursements from the bank statement total is necessary.

Unposted transactions will require denotation separately as “Deposits and Withdrawals Not Posted by the Bank.”

Otherwise, the month-end balance in the trust accounting records should match the adjusted end balance at this point. 

Need Help With Three-Way Reconciliation?

Completing the three-way reconciliation with accurately kept attorney-created records and bank statements helps to ensure that California attorneys remain in Compliance with Rule 1.15. Is it time for your firm to enlist the assistance of knowledgeable bookkeepers in Orange County? 

Call SmartBean® today for a free quote for our TAB services, created specifically with firms like you in mind!