Trust Reconciliation Statement: Three-Way Method

Quick Answer: A trust reconciliation statement proves that money held for clients is all there. It compares three figures on the same date: the adjusted bank balance of the trust account, the balance in the trust account journal (your checkbook register for the account), and the total of every individual client ledger. All three must agree. Bar rules commonly require it monthly or at least quarterly.

A trust account holds money that belongs to other people: a client's settlement, a tenant's security deposit, a buyer's earnest money. Because the money is not yours, an ordinary two-way bank reconciliation is not enough. You also have to show how much of the balance belongs to each person, which is why trust reconciliation is done three ways rather than two.

Why is a trust account reconciled three ways?

A normal bank reconciliation compares the bank statement with your books. That proves the account total, but it says nothing about who the money belongs to. Imagine a trust account holding $60,000 that ties perfectly to the bank. If one client's ledger shows $25,000 but that client's matter really had only $20,000 left after a disbursement nobody posted to their card, another client's money paid that difference. The total is right; the allocation is wrong; one client's funds have been used for another's. That is exactly what trust rules exist to prevent.

The three-way reconciliation adds the per-client check:

When all three agree, the account holds exactly what it should and every dollar is assigned to a person.

What does a trust reconciliation statement look like?

Here is a simple month-end example for a small law firm's IOLTA account on September 30.

Part 1: bank to journal

Part 2: client ledger listing

Adjusted bank, journal and client ledgers all show $80,000.00. The reconciliation is signed and dated, with the bank statement, the journal page and each client ledger attached.

Notice what is missing: there is no line for the firm's own money. Rules commonly allow a small amount of the firm's funds in the account to cover bank charges, and that amount is tracked on its own ledger (sometimes called a bank charges ledger) and included in Part 2. Anything beyond that is commingling.

How do you prepare a three-way reconciliation, step by step?

The Illinois ARDC's client trust account handbook describes the three steps in its explanation of Rule 1.15A: compare the checkbook register balance at the end of the period with the adjusted bank statement balance; add together the ending balances of all client ledgers; and compute the journal balance from the prior ending figure plus receipts less disbursements. Put into a working routine:

1. Post everything first. Enter every deposit and disbursement for the month in both the trust journal and the relevant client ledger. Each transaction must be in both places.
2. Record bank-originated items. Interest remitted to the IOLTA program, bank charges and returned items show up on the statement first. Post them to the journal and the correct ledger (a client's or the bank charges ledger).
3. Reconcile the bank to the journal. List outstanding checks and deposits in transit and arrive at the adjusted bank balance.
4. List the client ledgers. Run each client's ending balance and total them.
5. Compare all three. Investigate any difference before you sign.
6. Look for negative client balances. A client ledger below zero means you disbursed more for that client than you held, even if the total agrees. It must be corrected immediately and may need to be reported under your jurisdiction's rules.
7. Sign, date and file the reconciliation with its supporting pages.

What do differences in a trust reconciliation usually mean?

• Bank and journal agree, client ledgers do not: a transaction was posted to the journal but not to a client ledger, or posted to the wrong client.
• Journal and ledgers agree, bank does not: a bank charge, interest remittance or returned deposit has not been posted, or a check cleared for a different amount than written.
• Old outstanding checks: a client or third party never cashed a check. The funds still belong to them; follow your state's unclaimed property and bar guidance rather than moving them out.
• A deposit split across clients: one deposit covering several matters must be broken out on each client's ledger.

How often do regulators expect a trust reconciliation?

It depends on the jurisdiction and the type of trust account, so check your own rule. Two examples from lawyer regulation:

• Illinois: the ARDC handbook says to prepare three-way reconciliation reports of all client trust accounts preferably monthly, and not less than quarterly.
• California: the State Bar's client trust accounting resources describe a monthly three-way reconciliation and provide a handbook and a reconciliation form in PDF and Excel.

Other states set their own schedules. Even where the minimum is quarterly, doing it monthly is far easier, because finding one bad posting among three months of activity takes much longer than finding it among one.

Property managers, real estate brokers and escrow or title agents are regulated by state licensing bodies (real estate commissions, departments of insurance or financial regulation), not by bar rules. Their requirements for security deposit and escrow accounts follow the same three-way logic, with tenant or transaction ledgers in place of client ledgers, but the frequency, the forms and the reporting duties vary by state. Your licensing body's handbook is the authority.

What records should you keep?

A trust reconciliation is only as defensible as its file. Keep, for each account:

• monthly bank statements, canceled check images and deposit records;
• the trust receipts and disbursements journal;
• a ledger for every client, tenant or transaction, plus the bank charges ledger;
• each signed reconciliation with its client ledger listing;
• engagement letters, settlement statements and closing statements that explain each disbursement.

Retention periods are set by rule. Illinois, for example, requires complete records of client trust account funds to be kept for seven years after the end of the representation. Other jurisdictions and licensing bodies set their own periods, so follow yours.

Making the bank side faster

Trust accounting software builds the journal and ledgers for you, but the bank statement still has to be checked line by line. If your bank lets you download activity as CSV, start there. For statements that arrive only as PDFs, or for an audit that reaches back several years, QuickBankConvert can turn each trust account statement into a spreadsheet with dated, signed rows and the statement's opening and closing balances, ready to tick against the journal. It reads the statement only; the per-client allocation is still your ledger's job.

Before uploading client account statements to any online service, check your confidentiality obligations and read the provider's terms. QuickBankConvert uploads the file to its servers for parsing and keeps a copy, which you can ask to have deleted through the contact page; the details are in the privacy policy.

For the standard bank-to-books procedure that forms Part 1, see the bank statement reconciliation guide.

Related guides

• What goes into a bank reconciliation statement
• Getting ready for a bank or financial audit
• Reconciling a statement against your books