How to Reconcile a Law Firm Trust Account Each Month

A law firm's trust account is the one ledger where an ordinary bank reconciliation is not enough. The bank can tie to the penny while a single client sits short. The monthly close therefore needs a three-way match, and working papers that prove it was done.

What makes a trust account different?

Client money held in trust is not firm revenue. It belongs to the client until it is earned, and every dollar must be traceable to a named client or matter. Firm funds do not belong in the account at all.

Most jurisdictions require pooled client funds to sit in an interest-bearing account, often called an IOLTA account. The interest goes to a state program, not to the firm. Exact rules differ by jurisdiction, so confirm the local requirement before posting anything unusual.

The three-way reconciliation

The month-end reconciliation ties three balances together: the adjusted bank balance, the trust control account in the general ledger, and the sum of the individual client ledgers. All three must agree, every month.

Do them in order. Reconcile the bank first, for outstanding checks and deposits in transit. Then confirm the control account matches the reconciled bank balance. Finally, foot every client ledger and confirm the total equals the control account. Date and file the working paper when all three tie.

Practice tools and legal banking modules will maintain the client ledgers for you. We still treat the three-way tie as the test that matters, not the software's own confirmation screen.

A worked example

Suppose the bank statement shows $12,340 at month end. The control account shows $12,390, and the client ledgers total the same $12,390. The $50 gap is a service charge the bank took directly from the account, which nobody recorded.

That fee is the firm's cost, not the clients'. Charging it to pooled client funds is generally not allowed, and the usual cure is to record the charge and reimburse the trust account from operating funds. That returns all three balances to $12,390. Confirm the mechanics against your jurisdiction's rule before posting.

A second fault hides deeper. Say the bank and the control account both tie at $12,390, but one client ledger shows a negative $200. The total funds cover it, yet that client's money has paid another client's disbursement. A negative client ledger is a compliance problem even when the account as a whole is positive.

Where do earned fees come in?

Money moves from trust to operating only when the fee is earned and the amount is fixed. Jurisdictions split on the trigger: some allow a draw once the fee is earned under the engagement letter, others require an invoice or written statement first. Post both sides with the same date, one entry in each ledger, or the month-end cut-off breaks on one side.

What breaks a trust reconciliation?

• Lump deposits covering several clients, posted without a split by client or matter.
• Bank interest left sitting in the account instead of being withdrawn and remitted as the rule requires.
• A transfer recorded in the trust ledger but never in the operating ledger, or the reverse.
• A disbursement posted to the wrong client, which surfaces as one negative ledger.
• Old outstanding checks. Voiding them is not automatically correct; unclaimed funds rules usually apply.

Evidence worth keeping

Keep the bank statement, the three-way reconciliation, and a listing of client balances for each month, signed and dated by the preparer. Add support for every fee transfer: the invoice or written statement, and the journal that moved the money. Retention periods are jurisdiction specific, so follow the longer of the local rule and the firm's own policy.

When does it stop being bookkeeping?

Posting errors are bookkeeping, and they are yours to fix. Rebuilding client ledgers from bank records alone is not. If history went missing in a conversion, or the file shows damage such as balances that will not foot, stop. Take a backup, change nothing, and hand the repair to a specialist before anyone edits the data. The reconciliation can wait; the evidence should not.