When it comes to trust accounting, attorneys must reconcile their trust account bank statement to their clients’ individual balances on a monthly (or quarterly) basis. For trust account management, this reconciliation process is one of the most important aspects of maintaining compliance and administration.
What Is The Three Way Trust Account Reconciliation?
Best practices encourage Three-Way Reconciliation no matter how many trust accounts are involved. In the Three-Way reconciliation, there are three items in the process: the trust ledger (internal books), the client ledgers, and the trust account bank statement.
The trust ledger provides a summary of all the transactions in and out of a trust account.
The client ledgers are created by taking the trust ledger a step further, assigning each transaction to a specific client, and grouping together all the trust account activity associated with each client.
Both the trust ledger and the client ledgers should be maintained by a firm’s internal recordkeeping system, and their balances should always match.
The last component in a trust reconciliation - the trust bank statement - is generated by the bank where the trust account is held and it provides third-party verification of the transactions posted to the trust account.
3 Steps Easy For Reconciling Every The End Of Month
First: reconciling your account to the bank statement
Trust account reconciliation is the act of making our bank statement compatible with our trust accounting software or manual records. Reconciliation also gives you an overview of any clarity across your trust accounting records, help you match them with transactions on your bank statement.
Although a bank statement is trustworthy, there may be some figures that need to verify on the bank statement.
1. If there are any deposits made after the statement closing date, add them to the balance shown on the bank statement
2. If there are any checks or withdrawals made after the statement closing date, subtract them from the balance shown on the bank statement
Second: Compare the balance between your journal entries (in your internal books) and your reconciled trust account bank statement.
Third: In order to comply with state bar regulations, the trust account bank statement must be reconciled with the client ledgers every month.
What makes this process more complicated is that the balance on the trust bank statement will need to be adjusted before the reconciliation. Sometimes, there will be transactions that have occurred but have not been cleared in the trust bank account, so we need to alter the ending balance on the trust bank statement to account for these missing transactions. For example, if our clients gave a check and sent it to a payee prior to the month’s end but it was not yet deposited by the payee, the check would be recorded in the client ledger but it would not yet have shown up on the trust account bank statement.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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