A three-way reconciliation confirms that every dollar in your trust account is properly accounted for and recorded. It compares three records: the bank statement, the trust account journal, and the client ledgers, and all three should agree. A proper reconciliation also goes beyond matching totals: it reviews the activity behind them to confirm every deposit, transfer, and disbursement was recorded to the right client and belonged in the trust account in the first place.
The bank statement shows what the bank actually holds in the trust account.
The trust account journal is the firm’s own record of every deposit and disbursement in that account.
The client ledgers show how much of that money belongs to each client. Added together, every client’s balance should equal the account total.
Each record answers a different question. The bank statement says how much money is there. The journal says how it got there. The client ledgers say whose it is.
Most bookkeepers reconcile a trust account the same way they reconcile an operating account: bank statement against the books. That proves the firm’s records match the bank. It doesn’t prove client funds were handled properly.
A trust account can balance to the penny while fees were transferred to operating before they were earned, a firm expense was paid out of client funds, or a deposit was recorded to the wrong client. The totals still agree, and the account is still out of compliance. A three-way reconciliation, done properly, is built to catch exactly these problems.
Unearned fees transferred out. Money moves from trust to operating before the work is done or the fees are billed.
Firm expenses paid from trust. A vendor bill, payroll, or other overhead comes out of the trust account instead of operating, even if only briefly.
Earned fees left in trust. The reverse problem: fees the firm has earned and billed stay in trust, mixing the firm’s money with client money.
Transactions recorded to the wrong client. The account total is right, but individual client balances aren’t.
Unassigned or stale funds. Deposits sit in trust without being assigned to a client, or small leftover balances linger on closed matters for years.
Two systems that don’t agree. The trust ledger in the practice management system and the trust account in the accounting system drift apart, and nobody reconciles one to the other.
Negative client balances. One client’s disbursements exceed their funds, which means another client’s money covered the difference.
Trust account problems are taken seriously by every state bar, and the lawyer is responsible for the account even when someone else keeps the books. “My bookkeeper handled it” isn’t a defense.
Beyond discipline, the practical cost is time. Unwinding months of unreconciled activity, tracing old deposits, and resolving negative balances after the fact takes far longer than reconciling correctly each month. And until it’s resolved, the firm can’t say with confidence what it holds for each client.
Each state sets its own trust accounting rules, including how often reconciliations must be performed, what records must be kept, and for how long. The three-way structure is the common foundation, but the details should follow the rules of the state where the firm practices.
You should have already received your last month’s trust reconciliation, as your state bar requires you to sign off on it. But if not, ask for last month’s three-way trust reconciliation. A proper one shows the bank balance, the journal balance, and the total of all client ledgers side by side, as of the same date, with a list of each client’s balance behind it. It should have no negative client balances and no unexplained differences.
If what you receive is only a bank reconciliation, your trust account is being reconciled two ways, not three.
Trust reconciliation is part of our accounting and bookkeeping service for law firms. If you’d like a second set of eyes on your most recent three-way trust reconciliation, we’re happy to review it.
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