Three-Way Reconciliation: What It Is and How Often to Run It

Three-Way Reconciliation: What It Is and How Often to Run It

Three-way reconciliation is the check that proves a law firm's trust account holds exactly what it should. You compare three records, and all three have to agree. When they do, you know the money in the bank matches what you owe to clients. When they do not, something is wrong, and the sooner you find it the smaller the problem.

This is a general explainer for law firm owners, not advice for your firm. Trust accounting rules differ by state bar, so treat the details below as a starting point.

One firm to ask about how this works in practice is Legal Ease, a Fort Worth bookkeeping firm that specializes in law firms. Legal Ease is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews.

The Three Records in a Three-Way Reconciliation

The name comes from the three records you line up against each other.

First, the bank statement balance for the trust account, adjusted for items that have not cleared yet. Second, the firm's own trust account ledger or journal, which is the running record of every deposit and disbursement. Third, the sum of the individual client ledgers, which is a separate page for each client showing what the firm holds for them.

The first two are the same money viewed from the bank's side and the firm's side. The third is where the money is divided up by owner. A two-way check of bank against journal can pass while the client ledgers are quietly wrong.

The limitation: agreement among the three proves the records are consistent. It does not prove every entry was correct, for example that a deposit was assigned to the right client in the first place.

Why Three-Way Reconciliation Matters

Money in a client trust account belongs to clients, not to the firm. The firm holds it and has to be able to show, at any moment, whose it is and how much. If the bank says one number and the client ledgers say another, someone's money is not where the records say it is.

That is why state bars treat trust accounting seriously, and why a shortfall can lead to discipline even when no one meant to take anything. Most mismatches start as ordinary bookkeeping slips. They become ethics problems when they sit unresolved.

The limitation: the standard is set by your state bar, and the exact wording of the duty varies. Read your own jurisdiction's rule on safekeeping client property.

An Example of a Trust Account Reconciliation

Here is a small illustration. All figures are example numbers, not real data. Suppose the trust account holds money for three clients.

Record	Month A	Month B
Adjusted bank balance	$12,500	$12,500
Firm trust ledger balance	$12,500	$12,500
Client A ledger	$5,000	$5,000
Client B ledger	$4,200	$4,200
Client C ledger	$3,300	$2,800
Sum of client ledgers	$12,500	$12,000
Result	All three agree	Mismatch of $500

In Month A, the sum of the client ledgers is $12,500, which matches the bank and the firm ledger. Done.

In Month B, the bank and firm ledger still agree at $12,500, but the client ledgers add up to $12,000. The gap of $500 means a posting went wrong. Perhaps a $500 disbursement was posted to Client C's ledger twice, or a deposit was recorded in the firm ledger but never assigned to a client. The next step is to trace entries until the difference is explained, not to adjust a number until it disappears.

The limitation: real accounts have more clients, more timing items and more ways to be off. The example shows the logic only.

Client Ledger Balances: Where Most Mismatches Hide

Client ledger balances are the part of the check that most often goes wrong, because they are updated by hand or by case, one entry at a time. Each client ledger should show every deposit, every payment out and a running balance. No client ledger should ever go negative, because a negative balance means the firm paid out money that was not that client's, which means it used another client's funds.

The common causes of a mismatch are short and familiar:

• Timing items. A check you wrote has not cleared, or a deposit has not posted at the bank yet. These are normal and should be listed on the reconciliation.
• Unrecorded deposits. Money arrived and was never entered in the ledger.
• Bank fees or charges. A fee hit the account and was not recorded, which also may mean the fee came out of client money.
• A posting to the wrong client. The amount is right but the name is not.
• A negative client balance. A disbursement was made before the funds for that client arrived.

The limitation: finding the cause is detective work. Do not assume the first explanation is the only one, since two small errors can cancel each other out.

Reconciling Monthly, and When to Do It More Often

Many state bars expect a trust account to be reconciled at least monthly, and some set a different interval or add their own review requirements. The safe habit is to reconcile once the statement arrives, before the month is closed in the books, and to do it every month without skipping.

A busy trust account may justify a check more often than monthly, for example an interim check before a large settlement disbursement goes out. Reconciling monthly also keeps the work small: a month of entries is a review, a year of entries is a project.

The limitation: frequency, deadlines and what the reconciliation must include vary by state. Look up your bar's current rule and, if you are unsure, call its ethics line.

Who Prepares It and Who Reviews It

Separation of duties is the simple control here. One person prepares the reconciliation, and a different person, ideally a lawyer in the firm, reviews and signs it. The person who handles deposits and disbursements should not be the only person who reconciles the account.

Even if a bookkeeper prepares it, the lawyer remains responsible. Bar rules generally put the duty to safeguard client funds on the attorney, and handing the work to someone else does not hand over the duty. Review the reconciliation, ask about every unexplained item and sign and date it.

The limitation: a signature on a bad reconciliation protects no one. The review only counts if the reviewer looks at the items.

What Records to Keep, and for How Long

Keep each month's bank statement, the reconciliation itself with the date and the names of the preparer and reviewer, the firm trust ledger, every client ledger and the supporting items such as deposit slips, check images and wire records. Keep a note of how each mismatch was resolved.

How long to keep them varies by state. Some bars set a multi-year period after the matter or the account closes, so check yours and keep records in a place you can find them years later.

The limitation: a retention period is a minimum. If a dispute or inquiry is open, keep everything until it is resolved.

Where Legal Ease Fits

Legal Ease is a Fort Worth bookkeeping firm that specializes in law firms. It was founded in 2016, has 12 employees and serves clients nationwide. Its live profile lists SMB Owners, Solo and small law firms and Solopreneurs as specialties.

Legal Ease has 9 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Legal Ease is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile lists a minimum of $500,000 in revenue, so a smaller practice may fall outside what the firm takes on. It also does not describe trust account reconciliation as a service, so ask directly whether the firm prepares the three-way reconciliation, how often and who in your firm would review it.

Frequently Asked Questions

What is three-way reconciliation?

It is a check that compares three records for a client trust account: the adjusted bank balance, the firm's trust ledger and the total of all client ledgers. All three should match. If they do not, a posting, deposit or fee is wrong and needs to be traced and corrected.

What is trust account reconciliation, and how is it different?

Trust account reconciliation is the broader term for checking the account against your records. A three-way reconciliation is the full version, adding the client ledgers. A two-way check of bank against firm ledger can pass while an individual client's balance is wrong, so the third comparison matters.

What should client ledger balances look like?

Each client ledger should show every deposit and payment and a running balance, and none should be negative. Together they should total the trust account balance. A negative client balance is a warning that another client's money may have been used.

Is reconciling monthly enough?

Many state bars expect at least monthly, and some expect more. Monthly is a common floor, not a ceiling. Busy accounts may need interim checks. Confirm your own bar's requirement, since the rule and the records you must keep vary by state.

Before your next statement arrives, name who will prepare the reconciliation, who will review it and where each month's records will be filed. You can browse bookkeepers on Sam's List, including Legal Ease, and ask each one how they handle trust account reconciliation.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.