Many attorneys feel anxiety when they hear the words, “three-way reconciliation,” because the reconciliation is one of many obligations that come with using a trust account. Oh, and let’s not forget that it involves a lot of bookkeeping.
Depending on where you practice law, the reconciliation may need to be done monthly or quarterly. Either way, it is good practice to perform the task monthly, as it allows you to find errors and correct them promptly. Often, this process will also identify funds that have been earned, but not yet transferred from the trust account to the operating account; meaning, your firm is missing out on its hard earned money!
The three components to a three-way reconciliation are as follows:
1. The Trust Bank Balance, (using your bank statements)
2. The Trust Book Balance, (your bank ledger)
3. The Client Book Balance, (the client ledger)
These terms are easy for an accountant and bookkeeper to understand, but can be clear as mud for attorneys.
Essentially, you want the transactions you see on your trust account’s bank statement to be recorded in your books. Each of those transactions (coming in and out) that have been recorded to the trust account's book balance, must also be recorded to individual client/matter accounts. This is so you can identify who owns the funds. These transactions are generally recorded through receipts, disbursements, and then money transfers to your operating account once the funds are earned. There needs to be a paper trail and all three account balances must match to the penny.
If reconciling your trust account sounds like something you would prefer delegating to an expert, we can help! This is one of many tasks we enjoy doing!