If any practice manages trust accounts, they need to know what a 3-way bank reconciliation is. As a trust administrator they are required to perform this balance periodically, most likely every thirty to sixty days. These reconciliations are difficult to do by hand which is why so many attorneys depend on legal trust accounting software. They also depend on amazing accountants to handle 3-way reconciliation reports for them.
Three Balances, All Equal
You have probably performed a 2-way bank reconciliation at some point in your life when you balanced your checkbook. First you compare the latest bank statement (the “bank balance”) to your check register (the “book balance”). You do this correcting for checks or deposits that have not cleared yet. If you and the bank show the same balance, then you are fine. If not then somebody — probably you — made a mistake that needs to be corrected.
When you are managing a trust you really have two sets of ledgers: the check register and the individual client ledgers. The check register is a balance of the entire bank account. The client ledgers are balances of each client’s trust funds within the account. The sum of the individual client ledgers (the “client ledger balance”) must total the same as the bank balance and the book balance.
What If They Don’t?
If any of the three balances doesn’t agree with the other two, or worse, if all three give you different numbers, then there are mistakes in your ledgers. You need to go over each transaction and make sure it was entered the same on the bank statement and in your law firm billing software. Out of balance ledgers almost always mean an amount was entered wrong, or an amount was omitted from one of the balances. You also need to correct for uncleared transactions. If you have a payment or deposit in your register that has not cleared the bank, you adjust your book balance to correct for that. The great news we have to offer is that, with Spark, you don’t have to do a thing! We can handle these reconciliations for you to provide peace of mind and keep your firm in legal compliance.