I would give my right arm for the simplicity on the far side of complexity. – Oliver Wendell Holmes, Jr.
In the above quote, Holmes is observing what we have all observed at some point – that some things seem simpler than they are. Then when you actually try to do it – not so simple. Other things never even seem simple. That may be how you feel about reconciliation.
Like most things, regardless of how overwhelming it might have seemed before undertaking to learn it, the more I do it, the simpler it becomes. So, here are step-by-step instructions on how to reconcile an attorney trust account.
Disclaimer: This may be a long post.
How To Reconcile an Attorney Trust Account
The good news is that your are most likely doing the first step of reconciling an attorney trust account because you have to – in some form – make an accounting to each client of the funds you held on their behalf. If you use even the most basic accounting software, this is most likely done for you. To understand what your software is doing, you have to have a basic understanding of reconciliation first. So for this How To, everything is presented manually.
A simple client trust ledger might look something like this:
Client Trust Ledger
Minus Fees Earned: $500
Minus Expenses: $100
Returned to Client: $400
The Client Trust Ledger (sometimes called detailed trust ledger) is the fundamental building block of trust account reconciliation.
The simplest reconciliation would occur when you only had one client with one matter (file) and your representation was started and completed during one banking cycle. As soon as the bank statement is available, you simply compare the transactions on the client trust ledger to the transactions on the bank statement. It it might look something like this:
Success – at this point your trust account would be reconciled.
Of course, the world is not simple. A real world Client Trust Ledger looks more like this:1
The added complexity here is that there are gaps in the check numbers and the dates extend beyond one banking cycle. If you are reconciling each bank statement (and you should), the matter for Nora Jones would be reconciled against the bank statement at least four times: December, January, February and March.
An even further complexity is that for most clients funds are held in an Interest on Lawyer Trust Account (IOLTA) along with funds for other clients. So the Client Trust Ledger looks more like this:
Further, the bank statement for an IOLTA account is complex because:
1. It has transactions from several clients and several matters;
2. Transactions that show on the Client Trust Ledger may not yet show on the bank statement;
3. Transactions that show on the Bank Statement may not yet show on the Client Trust Ledger.
Here are four easy steps to simplify the complexity:
Reconciliation Step One
Make a list of your Client Trust Ledger transactions:
Reconciliation Step Two
Compare your Client Trust Ledger to your Bank Statement. Draw a line through every transaction that appears on both.
Reconciliation Step Three
List the items that appear on the Bank Statement but not the Client Trust Ledger (shown in green for clarity):
Reconciliation Step Four
For this example, assume that all of the transactions (checks, deposits, wires, etc.) from prior months have cleared. Next,
- Record the ending bank balance from the most recent bank statement.
- Add any deposits in transit. Deposits in transit are deposits and other amounts recorded in the company’s records that are not reflected on the bank statement. (In this example, there are none.)
- Subtract checks and other disbursements recorded in company records that are not reflected on the bank statement.
- Since this is an IOLTA account, there should not be any interest earned or bank fees.
If the Adjusted Client Trust Ledger balance equals the Bank Balance, the accounts are reconciled.
Congratulations to me! My made up transactions reconcile.
But In The Real World, Things Don’t Always Reconcile
When those two magic numbers (the Adjusted Client Trust Ledger and the Bank Balance) don’t agree, what then?
- Review the bank statement for unfamiliar items such as out-of-sequence checks, missing deposits or deposits that may have been directed to your account in error.
- Research the firm’s records for duplicate check or deposit entries, transactions recorded in the wrong account records or errors in recording entries.
- Use the identified errors and go through steps one through three above. Then compare balances again.
- Continue this process until the two balances agree.
Even though this fictional trust account reconciles, there are still some areas that need attention.
- The transactions from 1/13, 1/15 and 1/30 have not been entered into your Client Trust Ledger, they should be added and transactions involving clients should be added to the ledger contemporaneously with the transaction.
- Likewise, any transactions that show up on the Client Trust Ledger that do not show up on the bank statement should be questioned. For example, on 1/9 check number 824 was written as a client expense. We can look at the IOLTA Trust Account General Ledger and see that it was written to Dr. Eileen Rogers. It is probably uncommon for a medical doctor to sit on a check for 20+ days. A phone call or email may go a long way to avoid future reconciliation problems while keeping payees happy.
- Sign and date the bank reconciliation for the business to indicate your accountability for preparing it. Since reconciliation is required in many jurisdictions, the best practice would be to keep a hard copy of the reconciliation and another scanned copy.
Avoiding A Hidden Enemy
Remember check number 827? The Client Trust Ledger showed that it was void. Be careful of what happens to the actual check when it shows as void. In my case, the office administrator marked several checks void and then completed the actual check by hand or on a typewriter. Of course, a reconciliation would catch a check that is voided on the Ledger but actually issued for tens of thousands of dollars (or more).
Missing or out-of-order check numbers are also a concern. For example, if the check numbers for all of your transactions are in the 100s but you have one check in the 300s, investigate immediately. The likely explanation for this phenomenon is that someone pulled a check out of the bottom of the box or the back of the checkbook. Was it authorized?
Also, be wary of wire transactions. Money can be wired into your account or out of your account without a check being written. The best practice is require that your bank restrict wire transactions such that they require a writing. An additional safeguard is to require that your bank notify you by email when a wire is sent or received.
A Little Help From a Friend
As disclaimed, this is a long post. I will also concede that there are different ways to reconcile. I have left the comments open below for helpful suggestions. Please make them. Also, this process might be better understood through a Skype session where actual ledgers and bank statements can be analyzed. If this would help you, call me at (205)912-8248. I will refer you to a financial coach who has agreed to provide a coaching session (on trust accounting) for free.
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- Hire an Accounting Superhero and Get Saved - February 8, 2016
- IOLTA Trust Account General Ledger Image and Client Trust Ledger Card are both resources from Trust Accounting for Alabama Attorneys, a manual prepared by the Law Office Management Assistance Program, A Member Service of the Alabama State Bar. ↩