Why monthly reconciliation matters
Trust accounting is not just a bookkeeping task. It is part of protecting money that belongs to clients or third parties—and a basic control for detecting errors, unauthorized transfers, and improper use of funds.
A monthly reconciliation compares your trust bank account with the records showing what each client is entitled to receive. Done consistently, it can reveal problems while they are still manageable. Delayed reconciliation, by contrast, allows small mistakes to accumulate and makes it harder to determine whether the account contains enough money for every client.
Rules differ by state, including the required timing, records, retention periods, treatment of interest-bearing accounts, and handling of disputed funds. Check your state bar’s trust-account guidance and applicable rules. The process below is a general framework, not a substitute for jurisdiction-specific requirements or qualified accounting advice.
The three records you need
A sound reconciliation generally compares three related but distinct records:
- The bank statement balance. This is the balance reported by the financial institution for the trust or IOLTA account at the end of the reconciliation period.
- The trust-account checkbook or general ledger. This is your firm’s record of deposits, checks, electronic payments, transfers, bank fees, and other activity affecting the account.
- The individual client or matter ledgers. These show the amount held for each client, matter, or third-party beneficiary.
The essential check is that the adjusted bank balance, the firm’s trust-account ledger balance, and the total of all individual client ledgers agree. A difference may be caused by timing—such as an outstanding check—but it should be identified, documented, and resolved rather than ignored.
A single combined balance is not enough. Your trust account can appear to have money available while one client’s funds have effectively been used to cover another client’s shortage. Matter-by-matter records are what help prevent that problem.
A practical monthly process
Choose a regular date soon after receiving the bank statement. Consistency matters more than the particular day. Assign responsibility to a trained employee or bookkeeper if appropriate, but the supervising attorney should understand the process and review the results.
1. Gather the complete records
Collect the period-end bank statement, transaction detail, check images or electronic payment reports, deposit records, the trust-account ledger, and every client or matter ledger. Make sure the records cover the same period and account.
Do not rely only on the balance shown in practice-management software. Software can automate calculations, but it cannot determine whether a transfer was authorized, whether a payment was allocated to the correct matter, or whether a client’s funds should have been disbursed.
2. Match every transaction
Compare deposits, checks, electronic transfers, withdrawals, refunds, and bank charges to the books. Confirm that:
- Each deposit is recorded for the correct client or matter.
- Each disbursement has supporting documentation and proper authorization.
- Payments are posted to the right client ledger and in the correct amount.
- Transfers for earned fees occur only after the fees are properly earned and any required notice or billing procedure is satisfied.
- No personal, operating, or firm funds were deposited or paid from the trust account except as permitted by applicable rules.
- Bank fees or other charges are handled in a way allowed by your jurisdiction and the account arrangement.
Pay particular attention to electronic transactions. They can be less visible than checks and may post on a different date than the date entered in your books.
3. Identify outstanding items
List checks, electronic payments, and deposits that have not cleared. Investigate old outstanding checks rather than carrying them forward indefinitely. A stale check may need to be reissued, returned to the appropriate person, or handled under a state’s abandoned-property process.
Likewise, confirm that deposits recorded in your books were actually received by the bank. A deposit in transit should be supported by a deposit record, not merely an entry created in software.
4. Compare the three balances
Prepare a reconciliation that starts with the bank statement balance and adjusts for legitimate timing differences. Separately compare the resulting balance with the firm’s trust-account ledger and the sum of the individual client ledgers.
If the numbers do not agree, stop and investigate. Do not make a plug entry or move money simply to force the balances to match. Possible causes include:
- A transposed number or duplicate entry
- A missed bank transaction
- A check posted to the wrong matter
- An electronic transfer entered on the wrong date
- A deposit that was never made or was returned
- An unrecorded bank charge
- A negative client ledger
- An unauthorized or mistaken disbursement
Document the explanation for each difference and retain the reconciliation with the supporting records. If you cannot explain the difference promptly, involve qualified accounting assistance and consult your bar’s ethics or trust-account resources. A shortage or suspected misuse of client funds should be treated as urgent.
Controls that make reconciliation safer
Reconciliation works best as part of a small system of checks and balances. Consider using controls such as:
- Requiring a second person to review monthly reconciliations when staffing permits
- Restricting access to trust-account payments and online banking credentials
- Keeping blank checks and payment approval tools secure
- Requiring written support for every transfer or disbursement
- Separating billing approval from payment processing where practical
- Reviewing negative or unusually inactive client ledgers each month
- Recording the date, preparer, reviewer, and resolution of reconciling items
- Backing up accounting records and preserving an audit trail
Avoid signing blank checks, allowing untrained staff to make judgment calls about disbursements, or treating a client ledger as an informal note. Every ledger should allow someone reviewing it later to understand what money came in, why it was held, what was paid, and what remains.
What to do when a problem appears
First, preserve the records. Do not delete entries, rewrite history, or conceal an error. Create a clear correction supported by documentation and record when and why it was made.
Next, determine whether the issue is a bookkeeping error, a timing difference, an unauthorized transaction, or an actual shortage. Review the affected matter and any related matters. A discrepancy in one ledger may indicate a broader process problem.
Then obtain appropriate help. Depending on the circumstances, that may include a qualified bookkeeper familiar with legal trust accounting, a CPA, malpractice or professional-liability counsel, and your state bar’s ethics or trust-account office. State rules may impose specific duties when client funds are missing, records are incomplete, or a deposit is returned.
Finally, improve the process that allowed the problem to occur. Reconciliation is not merely a report to file away; it is feedback about whether your firm’s intake, billing, approval, payment, and recordkeeping procedures are working.
Key takeaways
- Reconcile the bank statement, firm trust ledger, and individual client ledgers every month.
- Investigate and document every difference; never force the books to balance.
- Track outstanding checks and deposits, especially those that remain open for an extended period.
- Review electronic transactions and client-level balances, not just the total account balance.
- Use access controls, supporting documentation, and a second review when possible.
- Because trust-account requirements vary, verify the details with your state bar and qualified advisors.
This article is general educational information and is not legal, financial, tax, or medical advice; verify requirements with your state bar and qualified advisors before acting.
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