Three-way reconciliation

Why a trust account needs three balances

A client trust account holds money that belongs to clients, not to the firm, so proving the balance is right means proving two separate things at once: that the total is correct, and that every client's share of it is correct.

An ordinary bank reconciliation proves only the first. It compares what the bank says against what the books say, and when those agree the account is treated as reconciled. For a trust account that is not enough, because the bank has no idea which client any dollar belongs to — it only knows the pooled total. The third balance, the sum of the individual client ledgers, is what proves the allocation underneath the total.

Three-way reconciliation

What a two-way reconciliation misses

A two-way reconciliation can balance perfectly while an individual client is overdrawn, because the bank statement reports one pooled total and cannot show how that total is divided between clients.

The failure looks like this. A disbursement is made against one client's matter, but more is paid out than that client had on deposit. The pooled bank balance still matches the books, because the money did leave the account and the books recorded it leaving. What has actually happened is that another client's funds covered the difference. Two balances agree; the allocation underneath them does not. Only when the per-client total is added as the third comparison does the shortfall surface as a number that does not tie.

How the three balances are structured in QuickBooks

QuickBooks holds all three pieces when the file is set up for trust work, though it performs no trust reconciliation of its own — there is no native trust module, so the comparison is done on a schedule rather than produced by a built-in report.

The structure has three parts. The trust bank account is recorded as its own bank account, separate from the firm's operating account. Paired with it is a trust liability account — an other current liability — because every dollar sitting in the trust bank is a dollar owed back to a client rather than firm revenue. The per-client detail comes from tagging every trust transaction to the client and matter it belongs to, which is what makes an individual client ledger possible to produce at all. Firm income is never touched by trust activity: money becomes revenue only when it is earned and transferred to the operating account against an invoice.

When the three balances do not agree

A trust reconciliation that will not tie is a bookkeeping problem with a specific shape, and which pair disagrees points at which kind of error occurred.

Bank against books disagreeing usually means an ordinary recording gap — a disbursement or deposit that never reached the books, a timing difference, or bank charges posted to the trust account. Books against client ledgers disagreeing means the total is held correctly but is allocated wrongly between clients: a transaction posted to the trust liability without a client attached, or attached to the wrong one. Client ledgers that do not sum to the bank means both problems at once. An untangling of that kind, worked transaction by transaction until all three tie, is what a trust account cleanup does.

The bookkeeping is ours to get right; the compliance obligation is not. The schedule a trust account must be reconciled on, the records a firm must retain, and the reporting a firm owes are set by the rules your firm practises under and remain the firm's responsibility, not ours and not QuickBooks'.

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