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Balancing Acts: Three-Way Reconciliation in Trust Accounting

Trust Accounting: What is Three-Way Reconciliation?

Attorneys must reconcile their Trust bank accounts periodically, either monthly or quarterly. This process is a critical component of ensuring compliance with IOLTA rules, and a best practice in this realm is the three-way reconciliation of trust accounts. But, how does this intricate process work?

The Three Components: Trust Ledger, Client Ledger, Trust Bank Statement

Three separate books come into play in three-way reconciliation: The Trust Ledger, The Client Ledger, and the Trust Bank Statement.

The Trust Ledger: This is an account within the Law firm’s books summarizing transactions in and out of the Trust Account.

The Client Ledger: A subledger within the Trust Ledger containing transactions assigned to each client or matter. Think of it as an open accordion.

The Trust Bank Statement: Generated by the bank, this statement provides third-party verification of transactions in and out of the Trust Account.

The Reconciliation Process

For a successful three-way reconciliation, all three components must match. Here’s how it unfolds:

Reconcile the Trust Ledger to the Trust Bank Account: Match all transactions from the Bank Statement to the ledger for the period under review (month or quarter).

Compare the Trust Account to Client Ledgers: The total should match. In other words, the sum of all Client ledger balances should equal the total of the Trust Account.

Compare the Bank Statement to Client Ledgers: The balance on the Bank Statement should equal the total of the individual Client Ledgers.

The Wrinkle: Adjustments for Uncleared Transactions

However, there’s a wrinkle! Part of reconciling the Bank Statement to the other accounts involves adjusting for transactions that have occurred but have not been cleared in the trust bank account. For instance, if the Law Firm sent a check to the court related to a client’s matter and it wasn’t deposited by month’s end when the bank statement closed, an adjustment must be made to the Bank Statement balance for that amount. Although recorded on the Law Firm’s books, it won’t show up in the Bank Statement.

And there you have it! Three-way reconciliation demystified—an essential practice for attorneys to ensure accuracy, compliance, and a harmonious trust accounting system.

Call Juris Ledger today if you have any questions about your Law Firm’s financials. You reach us at (410) 469-2450 or visit us at https://jurisledgerfrances.as.me/schedule.php to set up an appointment.

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