For law firms, conducting regular three-way reconciliations is not an option if they handle trust. Bar associations require these reconciliations as a way to verify that lawyers are fulfilling their fiduciary responsibilities and recording and tracking client funds properly.
Many people are familiar with the traditional two-way reconciliations where you compare your checkbook balance to your bank statement. If the numbers don’t match up, you then need to go through to see what entry could be causing the issue.
Parts of a three-way reconciliation
Running a three-way reconciliation is similar, because you’re still comparing the ledger balance and the bank balance – but you’re also in a third item: the sum of the individual client ledgers.
The total of the individual client ledgers must match the balances of the ledger and the bank statement.
One way to do a three-way reconciliation is manually. First, you should look at every open individual client ledger balance. Then, add up this balance to get the total of the individual client ledgers.
Next, to get your overall ledger balance, you should total all of the deposits you made in the past month from your ledger records and do the same for any disbursements. Take last month’s ledger balance, add the deposits and subtract the disbursements to get your final ledger balance.
Finally, you need to get a reconciled bank balance. You should look at the ending bank balance, add any deposits in-transit and subtract any outstanding checks.
Once you have these three amounts, you can then compare them. They should all be equal. If they’re not, you should find the difference between the amounts and look to see what entry could be added or missing to cause the discrepancy.
Legal-specific accounting software often comes with the ability to run three-way reconciliations, whereas generic accounting software does not. Three-way reconciliations aren’t widely used outside of the legal industry, which means broad-based tools don’t have the capability built in.
With legal-specific software, there is frequently a one-click button that will calculate that three-way reconciliation report.
Remember: it’s critical to run these three-way reconciliations on a regular basis.