As a lawyer, at some point during your practice, you may be responsible for clients’ trust accounts. Trust accounting is a highly feared area by lawyers due to the regulations and implications if procedures are not adhered to. It is crucial that you understand how to manage trust accounts as this can cause you to lose your license to practice. Trust accounting is simply ensuring that funds given in trust by a client are not tied up in the law firm’s accounts.  Here are a few commonly asked questions and how to deal with them.

How Does My Three-Way Reconciliation Look? 

Most states require a three-way reconciliation of the trust account. Your three-way reconciliation is usually tied to your bank statement’s closing date. You’re probably already familiar with a two-way account if you’ve ever balanced a checkbook. This usually includes verifying that the balance on your bank statement, when adjusted for uncleared deposits and withdrawals, matches the balance in your books or checkbook. In addition to performing a two-way reconciliation, you would need to do a third one where you would need to check the client trust ledger balance against the adjusted bank balance and the book balance.

Generating your three-way reconciliation report can be as simple as the click of a button, depending on the financial software you use for managing your firm’s trust funds. But, understanding the process can make your life much easier. A three-way reconciliation typically features the Bank account balance, the Book balance, and the Balance by matter. Your main concern should be ensuring that all the numbers on each of these sheets match. 

What Does My State Require?

Since May 2019, 26 states (AL, AZ, IL, IA, MA, MO, NJ, SC, CA, CT, FL, HI, LA, MD, MS, MT, NH, NM, NC, OH, PA, TN, VT, WA, WI, WY) require attorneys to perform three-way reconciliations for client trust accounts. Each state has its own requirements. Some require a monthly report, while others require a quarterly report. Be sure to do your checks to ensure that you are complying with your state regulations. Find out if they require three-way reconciliations for your clients’ trust accounts and how often. 

Do I or My Current Bookkeeper have A Three-Way Reconciliation? 

If your bookkeeper is managing your books, he or she should be able to perform your three-way reconciliation. Of course, all the intricate rules and requirements of your state must be followed. Ensure that you only hand over your books to reputable bookkeepers with a proven track record of confidentiality and reliability.

Here is a sample of how a three-way reconciliation may look:

Source: CosmoLex

Do I have Client Ledgers?

If you have to manage a pool of trust funds, such as with an IOLTA, you definitely have multiple client trust ledgers. You will also have a ledger for bank charges. The total of all the ledger balances should match the IOLTA’s adjusted bank balance and book balance.

Source: CosmoLex

Do they Balance with My Accounting Software?

All accounting software is not created equal. So, you may be able to pull data from your bank statements and ledgers into the software but not be able to perform a three-way reconciliation. If you use Xero or QuickBooks, you can integrate other software to accurately perform this function. Find the best software that works for you.

What Disbursements are Outstanding? 

Once the three-way reconciliation is completed and balanced, you need to review your outstanding disbursements. This is any money that has not yet been paid over to a client or agency. If they are over 30 days old, you will need to find out why. In some cases, all you might need to do is void the disbursements and reissue.  It is a good practice to take note of the reason for the outstanding item and research done on them.

Are there Deposits Listed as Outstanding that Should Have Cleared?

Once the three-way reconciliation is completed and balanced, you need to review the outstanding deposits, if any. If there are outstanding deposits, these need to be immediately looked into.  It is important to take note of the reason for the outstanding deposit and when it is expected to be cleared. This will help you to easily recognize and fix errors when you see them.

Final Thoughts

The golden rule for ensuring you don’t get into any issues with trust accounting is ensuring that you keep your accounts separate. This will help to prevent you from accidentally spending your clients’ funds. This could include unearned fees (such as retainer fees), settlement funds, or advanced costs and court fees. Another rule of thumb is ensuring that you are following your state’s regulations.

If you’re having issues managing your bookkeeping and trust accounting tasks, we’d be happy to help you. At Bookkeeping Confidential, our primary focus is maximizing profits. Let’s take care of you.