Trust account reconciliation, step by step

A trust reconciliation is not a bank reconciliation with a different name. A bank reconciliation asks one question: does the account agree with the books? A trust reconciliation asks that, and then asks a second question that matters more — is the money in the account correctly attributed to the clients it belongs to?

You can pass the first and fail the second. That is precisely the situation the process is designed to catch, and it is why the work is called a three-way reconciliation rather than a two-way one.

The three figures

Everything below is in service of producing three numbers that must be identical, to the cent, as at the same date.

1. 1The adjusted bank balance — the trust account statement, corrected for items that have not cleared
2. 2The trust ledger balance — what your own books say the trust account holds
3. 3The sum of the client ledgers — every individual client's trust balance, added together

If all three agree, the account balances and the money is attributed. If the first two agree and the third does not, the account balances but the attribution is wrong — which can mean one client's funds are covering another's shortfall.

Step 1 — Fix the date and stop moving

Pick the date, take the statement to that date, and take every other figure to the same date. This sounds trivial and it is the single most common source of a difference that turns out to be nothing: a client ledger printed on Tuesday compared against a statement to Friday will not agree, and the hour spent looking for the cause is wasted.

Step 2 — Adjust the bank

The statement is the bank's view, and the bank is always slightly behind. Two adjustments bring it to reality:

• Deposits in transit — money you have received and recorded, which has not yet appeared on the statement. Add these.
• Outstanding cheques — payments you have issued and recorded, which have not yet cleared. Subtract these.

List them individually rather than as a total. A single figure for 'outstanding cheques' is impossible to check next month, and stale items — a cheque outstanding for six months — are themselves a finding. If an item has been sitting on the list for several reconciliations, it needs a decision, not another month on the list.

What does not belong in this adjustment

Bank charges, interest credited, and anything else the bank has done that you have not recorded are not bank adjustments — they are ledger adjustments. The bank already knows about them. Post them to your books, then continue. Adjusting the bank side for them will make the reconciliation balance and leave your ledger wrong, which is the worst of both outcomes.

Step 3 — Take the trust ledger balance

This is the balance of the trust bank account in your own accounting records, at the same date, after posting anything found in the previous step. Nothing clever happens here — but note that it is a single account balance, not a total of client balances. Those are step four, and conflating them defeats the whole exercise.

Step 4 — List every client ledger

Every matter holding trust funds, with its balance, as at the date. Add them up. This is the step firms skip when they are short of time, and it is the only step that can detect misattribution.

Two things to check while the list is in front of you, both of which are findings in their own right:

• Any client ledger with a negative balance. A client ledger cannot be overdrawn — trust money belongs to a client, and a negative balance means one client's funds have paid another's disbursement. This is serious, it does not net off against a surplus elsewhere, and it needs correcting immediately rather than at the end of the reconciliation.
• Any balance that has not moved in a long time. Dormant trust funds have their own rules, and they do not resolve by being left alone.

Step 5 — Compare, and work the differences in order

Compare bank against ledger first. Only when those agree, compare ledger against clients. Working both differences at once is how an afternoon disappears — the causes are different and mixing them means testing two hypotheses against one number.

Bank against ledger is out

• A bank charge, fee or interest credit not yet posted to your books
• A deposit or cheque missed from the outstanding lists in step two
• An amount entered twice, or entered on the wrong side
• A transposition — two digits swapped. A difference that divides evenly by nine is nearly always this.

Ledger against clients is out

• A receipt or disbursement posted to the trust account but not to any client ledger
• The same, posted to the wrong client ledger — this leaves the total right and two clients wrong, so it will not show as a difference at all if the two errors are equal and opposite
• A transfer between two matters posted on one side only
• Interest allocated to the account but not to the clients entitled to it

Step 6 — Keep the working

The reconciliation is not the three figures. It is the three figures plus the evidence: the statement, the itemised list of outstanding items, the client listing, the date, who prepared it, and who reviewed it. A reconciliation that balances but cannot be reproduced six months later has not been done, in any sense that would satisfy anyone asking.

The frequency, the retention period and the signing requirement all come from your law society. Whatever they are, the practical advice is the same: do it on a schedule rather than when there is time, because a reconciliation that is a month late is not a reconciliation that is a month late — it is a month during which a difference could have been found and was not.

Why this is hard in a spreadsheet

Not because the arithmetic is difficult; it is addition. It is that the three figures come from three different places, and keeping them in step is manual work that has to be repeated exactly, every period, forever. The client ledger listing in particular is only as current as the last time somebody updated it — and if it is maintained separately from the transactions that feed it, it is a second set of books that has to agree with the first.

When the trust requests, the transactions and the client ledgers are the same record rather than three that have to agree, most of the difference-hunting above stops being necessary. The reconciliation still has to be done and still has to be evidenced. It just stops being a search.