A three-way reconciliation is more than a bank reconciliation. It compares three balances supported by different records as of the same ending date:
- The bank-statement balance adjusted for outstanding checks, deposits in transit, interest, and documented bank activity
- The ending balance in the trust-account register or general ledger
- The total of every individual client or matter ledger, including an administrative ledger when applicable
The State Bar of Arizona states that if these calculated totals do not match, or if one of the three categories is missing, the work is not a proper three-way reconciliation. Its trust-account page also links to a reconciliation form, client-ledger form, general-ledger form, and trust-account manual.
Before the reconciliation
- Use the same statement ending date for every report.
- Obtain the complete bank statement and readable transaction support.
- Post all authorized activity through the ending date.
- Confirm that every client with funds has an individual ledger.
- Separate old unresolved items from current-period activity.
Step 1: reconcile the bank
Start with the statement ending balance. Add deposits in transit and subtract outstanding checks and transfers that are supported by records and had not cleared by the statement date. Record bank interest, returned items, charges, or corrections through the authorized process. Do not leave a difference in the reconciliation simply to force the adjusted balance to the books.
Step 2: confirm the trust register
The trust register should contain the deposits, disbursements, transfers, and authorized administrative activity through the same ending date. Review unusual descriptions, gaps in check sequences, negative running balances, voided transactions, and changes made after the prior month closed.
Step 3: total the client ledgers
Generate or calculate the ending balance for every client or matter ledger and total them. A zero-balance ledger may still be relevant to the audit trail, but it should not change the total. Investigate a negative client balance immediately. It can indicate that funds were disbursed for one client before sufficient collected funds were available for that client.
Step 4: compare and investigate
The adjusted bank balance, trust register, and client-ledger total should agree. If they do not, preserve the reports and identify the difference. Useful diagnostic questions include:
- Was an item posted to the bank but omitted from the register?
- Was a transaction recorded twice through an integration and a bank feed?
- Was a client or matter ledger omitted from the total?
- Was a transaction assigned to the wrong client?
- Did a prior-period transaction change after the previous reconciliation?
- Are outstanding items genuine and still expected to clear?
Step 5: document the close
Keep the bank statement, reconciliation report, trust register, client-ledger list, supporting schedules, and notes resolving exceptions together. The person who prepared the reconciliation and the lawyer responsible for review should follow the firm’s documented approval process.