Guides · Trust accounting

What is three-way trust reconciliation?

Three-way trust reconciliation is the monthly check that three figures agree: the balance on the IOLTA bank statement, the balance in the firm's own trust ledger (the book balance), and the total of every individual client's ledger. When the three tie, the firm can show that the money in the bank is exactly the money it holds for clients, client by client. Most state bar rules require it monthly, and it is the first thing a trust audit asks to see.

The three legs

The bank statement. What the bank says was in the account on the statement date. This is the outside evidence; the firm cannot change it.

The book balance. The running balance the firm keeps for the whole trust account: every deposit and every disbursement it has recorded, whether or not the bank has processed it yet. Between the two sit the timing differences — a check the firm wrote that has not cleared (an outstanding check), or a deposit made after the bank cut the statement (a deposit in transit).

The client ledgers. One ledger per client, and where the firm separates a matter's funds, one per matter. Each shows what the firm holds for that client right now. Added together they must equal the book balance, because the trust account contains nothing but client money.

Why "three-way" and not two

Reconciling the bank to the book catches arithmetic and posting errors, the way any bank reconciliation does. It does not catch the error that matters most in trust: paying one client's expense out of another client's funds. The book balance stays right, the bank agrees with it, and a client's ledger has quietly gone negative. Only the third leg — the sum of the client ledgers, checked ledger by ledger — exposes that. That is why a two-way reconciliation is not enough for a trust account and why bar rules ask for three.

What a completed reconciliation has to show

• The statement date and the statement ending balance.
• Each outstanding check and each deposit in transit, individually, with dates and amounts.
• The adjusted bank balance: statement balance plus deposits in transit minus outstanding checks.
• The book balance on the same date.
• A list of every client ledger with its balance, and their total.
• All three figures side by side, and who completed the reconciliation and when.

Keep the completed record. A reconciliation that lives only in someone's memory of having done it is, for audit purposes, not done.

When the figures do not tie

Do not force them. The usual causes, in order of frequency: a deposit or disbursement recorded against the wrong client, a bank fee charged to the trust account (which should never happen, and must be reimbursed from operating), a transposed digit, a check recorded twice, or a fee transfer recorded on the books but never actually moved at the bank. If the difference cannot be resolved by the statement date, record the reconciliation with the variance and a written explanation, and clear it the following month. An honest variance with a note is defensible; a reconciliation adjusted until it agrees is not.

How ModusBill does it

ModusBill keeps the three legs from drifting apart by construction. The book balance is not a separate number: the trust account's balance is the sum of its client ledgers. A client ledger can never go negative, because a disbursement that would overdraw it is refused at the moment it is recorded. Every entry is appended and never edited; a correction is a reversing entry beside the original. The reconciliation screen lists the fee transfers that have been recorded but not yet moved at the bank as the reconciling difference they are, takes the statement balance and the outstanding items, computes the adjusted figure, and stores a printable record when it is completed — with a variance and a note if that is the truth of the month.