3-Way Reconciliation Ensures Trust Account Compliance Sandra Lazar posted on the topic

Create an “unidentified funds” ledger entry and document your investigation efforts. When reconciliation reveals any inconsistency – any amount, no matter how small – act immediately. A $5 discrepancy Bookkeeping for Law Firms today becomes a $5,000 discrepancy in six months if the underlying cause isn’t identified and corrected. Consider the case of a trust established in 2017 after the passing of a father with substantial assets and rental properties.

Document Management

Depositing client money into an operating account – even for one day, even by accident – violates ethics rules in every U.S. jurisdiction. Legal-specific accounting software simplifies this process by automatically categorizing transactions and assigning them to individual client ledgers. Save invoices and records for all trust disbursements, including attorney fees, property maintenance, and professional services. Keep receipts for all expenses paid by the trust and maintain a file for all correspondence with beneficiaries. This includes a detailed check register for paper checks, as well as logs for electronic payments, wire transfers, and cash disbursements. Record all deposits and withdrawals, and note any fees deducted directly from investment statements or bank accounts.

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Settlement proceeds — Funds received on behalf of clients from insurance companies, opposing parties, or other sources. These require careful tracking, proper holds for liens, and documented disbursement. An experienced accounting and consulting firm that understands probate formats and court requirements can reduce administrative burden and increase accuracy. When using the customer method, you must know what is in the total sum of the parent account. The Bar Association wants to see that you know to the penny what is in each account that totals the entire trust bank account balance.

How Do Trust Accounting Rules Affect Your Law Firm’s Bookkeeping?

• By collecting W-9s upfront, keeping detailed records, and correcting errors quickly, your firm can avoid common pitfalls and stay compliant.
• If you ever need a business loan, having money in a savings account will help you qualify for one.
• This will ensure that any method you pursue to reduce trust account usage is within compliance.
• Specialized legal accounting software can automate much of the reconciliation process.
• Proper trust accounting ensures that client funds are safeguarded and used only for the intended purposes.

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What Steps Ensure Ongoing Compliance?

It demonstrates your commitment to ethical practice and client service. Clients notice when their funds are handled professionally, and this attention to detail builds the trust that drives referrals and repeat business. Mixing client funds with firm money represents the most serious trust accounting violation. This mistake occurs more often than you might expect, sometimes through simple administrative errors. Every transaction in your trust accounts needs to be documented clearly and carefully.