Trust accounting without the dread

Why trust work feels heavy

Trust money belongs to the client, not the firm, and every cent has to agree across three records at once. When those records drift apart, the gap is rarely large. It is usually a deposit banked to the wrong ledger or a cheque that has not cleared, but finding it at month end can take a full day.

I have kept the trust books at Northbank Law for six years. The dread went away when I stopped treating reconciliation as a monthly event and started treating it as a daily check that happens to get signed once a month.

This guide is the routine I use, written down step by step. It covers the three records you are reconciling, the daily check that keeps them close together, how to trace a difference when one appears, and what to have ready when the auditor writes. It assumes you know what a trust account is for. It does not assume you enjoy reconciling one.

The three records

A three-way reconciliation compares three figures that must agree on the same date. If any one of them is off, you have something to explain before anyone signs.

1. The bank statement balance for the trust account (IOLTA in the US), adjusted for unpresented cheques and deposits not yet cleared.

2. The trust cash book, the running record of every receipt and payment in date order.

3. The total of every client ledger, which is what the firm holds for each client and matter added together.

The adjustments on the bank side are where most first-time reconcilers go wrong. The bank only knows what has cleared. Your cash book knows what you have banked and paid, including cheques the payee has not presented yet and a deposit made after the bank’s cut-off. Adjust the bank balance for those items, and only those items, before you compare it with anything else.

Here is a simple month end for a small trust account:

• Bank statement balance at 31 October: $412,860.00

• Plus a deposit banked on 31 October that cleared on 1 November: $18,500.00

• Less two unpresented cheques: $6,240.00

• Adjusted bank balance: $425,120.00

• Trust cash book balance: $425,120.00

• Total of 63 client ledgers: $425,120.00

All three agree, so the reconciliation balances. If the client ledgers had totalled $425,020.00, the bank and the cash book would still agree with each other, and the $100 difference would point to a posting between ledgers rather than a missing transaction.

A routine that keeps the gap small

Filebird runs the three-way reconciliation daily, so most mornings I am only looking at yesterday’s movements. I clear exceptions the same day, while the matter is still fresh in someone’s mind. At month end the work is a review rather than a hunt.

• Each morning, open the reconciliation and clear any flagged items before 10am.

• Match every receipt to a matter on the day it lands. Unallocated funds are where errors hide.

• Check a client ledger’s balance before every payment. An overdrawn ledger means another client’s money covered it.

• On the last business day, attach the bank statement and have the responsible principal review and sign the reconciliation.

Receipts and payments, done properly

Most differences start on the day money moves, so the daily routine really comes down to two moments: when money comes in and when it goes out.

When a receipt lands, match it to a client and a matter the same day. If you cannot tell who it is from, record it as unidentified and chase it, rather than parking it on the most likely matter. A deposit on the wrong ledger balances perfectly in total and is wrong for two clients at once.

Before money goes out, check three things on the matter: that the client ledger holds enough, that the funds have cleared, and that the payment is authorised in the form your rules require. In Filebird the ledger balance and cleared funds sit on the payment screen, so the check takes seconds. It still has to be done every time, including for the urgent payment at 4.55pm on a Friday.

Almost every overdrawn ledger I have seen came from an urgent payment. Nobody meant to use another client’s money. They meant to check the balance afterwards.

When the numbers do not match

Start with the size of the difference. A round number usually means a missed entry. A figure that divides evenly by nine often means two digits were transposed, and a difference equal to one transaction usually means it was posted twice or not at all.

Then work backwards from the last date all three records agreed. This is why the daily check matters: you are searching one day of transactions, not thirty.

Every firm we migrate has at least one ledger that has been out by a few dollars for years. Daily reconciliation is how that stops being normal.

Lukas Berg, Migration lead, Filebird

If those checks do not find it, go through the likely causes in this order. It is roughly the order I find them in.

1. A receipt or payment posted to the wrong client ledger. The total still agrees with the bank, so compare ledgers instead.

2. A bank fee or interest entry that reached the statement but not the cash book.

3. A cheque recorded at the wrong amount, often a transposition such as $1,450 entered as $1,540.

4. A transfer to the office account recorded twice, or recorded in one record and not the others.

5. A dishonoured deposit that was reversed by the bank but never reversed in the cash book.

Write down what you find, even when it is small and already fixed. A one-line note such as “Receipt for M-2207 posted to M-2270, corrected 4 November” answers the auditor’s question before it is asked.

What auditors want to see

Trust auditors and examiners want evidence that you reconcile on schedule, that a principal reviews and signs each reconciliation, and that differences are investigated promptly. Frequency and deadlines vary, so check your law society or state bar’s rules for the exact requirements where you practise.

Keep one folder for each month with the signed reconciliation, the bank statement and a short note on every exception you cleared. When the audit letter arrives, you send the folders and get back to work.

Month end in twenty minutes

With the daily check behind you, month end is a review. This is the order I work in on the last business day.

1. Download the bank statement for the month and attach it to the reconciliation.

2. Confirm that every unpresented cheque and uncleared deposit on the list is still genuinely outstanding. Anything older than a few months needs a follow-up.

3. Check that no client ledger is in debit, and that unidentified receipts have been allocated or are being chased.

4. Review any ledger with no movement for a long time. Your rules may require you to report or deal with old balances.

5. Export the three-way report, sign it and pass it to the responsible principal to review and sign.

The principal’s review is not a formality. They should be able to read the report, see the exceptions and ask about anything unusual. If they cannot, the report needs to be clearer, not shorter.

When the bookkeeper is away

A routine that only one person can run is a risk, however good that person is. Trust deadlines do not move for annual leave.

• Name a backup for the daily check and walk them through it at least once a quarter.

• Keep this routine written down where the backup can find it, with logins and permissions already set up.

• Give the responsible principal a backup too, so a signature is never the reason a reconciliation is late.

• Check the backup’s work the first few times, then trust it.

When I take leave, our backup runs the daily check and I review her notes when I am back. Because every exception is written down, that review takes about an hour.