Three-Way Reconciliation for Law Firms: Step-by-Step Guide
Updated November 2025
State bars require monthly three-way reconciliation. Not recommend—require. Yet fewer than 60% of small law firms do it consistently, according to the American Bar Association.
The consequence isn't just inefficiency. It's the single most cited violation in attorney disciplinary actions involving client funds.
Three-way reconciliation confirms that your trust bank statement, individual client ledger balances, and general ledger trust liability account all match to the penny. When these three figures align, you have proof - verifiable, audit-ready proof - that every client dollar is accounted for and properly allocated.
This isn't bookkeeping theater. It's the foundation of IOLTA account compliance and the first thing auditors examine during bar investigations.
What Is Three-Way Reconciliation?
Three-way reconciliation compares three separate financial records to verify that client funds held in your IOLTA account are accurately tracked and properly segregated. All three must reconcile exactly - down to the cent.
The three components are:
1. Trust Bank Statement Balance
The ending balance from your trust account bank statement, adjusted for outstanding checks and deposits in transit.
2. Sum of Individual Client Ledger Balances
The total of all client-specific ledgers showing funds held in trust for each client and matter.
3. General Ledger Trust Liability Account
The trust liability balance in your firm's general ledger, representing the total amount owed to all clients.
When performed correctly, these three figures match exactly. Any variance - even one dollar - signals an error requiring immediate investigation.
Bar associations require monthly reconciliation within 10-15 days of month-end. Some jurisdictions mandate specific reconciliation forms. Failure to reconcile monthly violates ethics rules in nearly every state, even when no client funds are missing.
Overview of typical asset and liability categories for law firm financial statements, including trust account balances and client trust liabilities.
Why Three-Way Reconciliation Is Non-Negotiable
The ABA Model Rules of Professional Conduct, particularly Rule 1.15, require attorneys to safeguard client property and maintain complete records. Three-way reconciliation is the primary control mechanism that demonstrates compliance.
Without it, you cannot prove:
Client funds are properly segregated
No commingling has occurred
Trust account activity is accurately recorded
Individual client balances are correct
Bar auditors specifically request three-way reconciliation documentation. Missing reconciliations - even for a single month - can trigger full audits, require forensic reconstruction of trust records, and result in disciplinary action regardless of whether funds were misappropriated.
The consequences of failed or missing reconciliation include:
Immediate compliance violations
Mandatory audits at firm expense
Suspension of trust account privileges
Professional liability claims
License suspension or revocation
Florida suspended a personal injury attorney for two years after discovering 14 months of unreconciled trust accounts - despite no missing client funds. Illinois fined a family law attorney $15,000 for quarterly rather than monthly reconciliation. New York revoked an estate planning lawyer's license after auditors found three years of incomplete reconciliation records.
These aren't cases of fraud. They're cases of inadequate systems. And they're preventable.
Cash flow statements help law firms separate trust account activities, investments, and financing decisions for accurate reporting and compliance.
The Three Components Explained
Understanding what each component represents and how to verify it is essential for accurate reconciliation.
1. Trust Bank Statement (Adjusted Balance)
Your trust bank statement shows all deposits, withdrawals, and cleared transactions for the month. The adjusted bank balance accounts for timing differences:
Start with: Bank statement ending balance
Add: Deposits in transit (received but not yet reflected on bank statement)
Subtract: Outstanding checks (issued but not yet cleared)
Result: Adjusted bank balance
This adjusted figure represents the true cash position of your trust account as of the reconciliation date.
Common bank statement issues include:
Bank fees charged to trust account (often prohibited)
Interest earned (must be tracked separately for IOLTA reporting)
Wire transfer fees
Returned check charges
Review every line item. Trust accounts should have minimal bank activity beyond client deposits and authorized disbursements.
2. Individual Client Ledger Balances (Sum Total)
Each client must have a separate sub-ledger tracking their trust funds. This ledger shows:
Initial retainer or settlement deposit
Costs advanced on client's behalf
Fees earned and transferred to operating account
Disbursements to client or third parties
Current balance held in trust
Sum all individual client ledger balances. This total represents the aggregate amount owed to all clients.
Your practice management software (Clio, MyCase, or similar) should maintain these ledgers automatically. If tracking manually, use a spreadsheet with one row per client showing current balance.
Client ledger errors typically occur when:
Transactions post to wrong client
Fees transferred from trust without proper documentation
Client costs charged to wrong matter
Deposits split incorrectly across multiple clients
Run a client ledger detail report showing every client balance as of month-end. Export to Excel and verify the sum.
3. General Ledger Trust Liability Account
Your general ledger contains a trust liability account - a balance sheet account representing the firm's obligation to clients. Every trust transaction should post to both the trust bank account (asset) and trust liability account (liability).
When you deposit a client retainer:
Debit: Trust Bank Account (asset increases)
Credit: Trust Liability Account (liability increases)
When you disburse funds to a client:
Debit: Trust Liability Account (liability decreases)
Credit: Trust Bank Account (asset decreases)
The trust liability account balance should always equal the sum of individual client ledgers and the adjusted bank balance.
If your general ledger trust liability doesn't match client ledgers, investigate:
Missing transactions in general ledger
Duplicate postings
Incorrect accounts used for trust transactions
Timing differences between systems
Law firms managing client trust accounts should review these three core financial reports monthly.
Monthly financial reporting, including trust account reconciliation, helps law firms maintain compliance and drive better decision-making.
Step-By-Step Monthly Reconciliation Process
Perform this process within 10 days of month-end. Block 60-90 minutes of uninterrupted time.
Step 1: Reconcile Bank Statement to Trust Register
Pull your trust account bank statement and trust account register (checkbook or accounting system record).
Match every cleared transaction:
Check each deposit against your register
Verify every withdrawal, check, and transfer
Note any bank fees or interest
Identify deposits in transit (recorded but not cleared)
List outstanding checks (issued but not cleared)
Calculate adjusted bank balance:
Bank statement ending balance: $________
+ Deposits in transit: $________
- Outstanding checks: $________
= Adjusted bank balance: $________This adjusted balance should match your trust register balance. If not, find the discrepancy before proceeding.
Step 2: Generate Client Ledger Report
Run a client trust ledger report from your practice management software showing all client balances as of the last day of the month.
Review for red flags:
Negative balances (indicates one client's funds used for another - immediate violation)
Stale balances (funds held for closed matters beyond 90 days)
Unusually large balances (verify recent deposits posted correctly)
Sum all positive client balances. This is your total client liability.
If you find negative balances, stop immediately. Negative client balances indicate trust account violations requiring urgent correction. Never proceed with reconciliation when negative balances exist—address the violation first.
Step 3: Verify General Ledger Trust Liability
Pull your general ledger and locate the trust liability account (often numbered 2100 or similar).
Record the ending balance as of the last day of the month. This should be a credit balance (liability) equal to funds owed to clients.
If your trust liability account shows a debit balance, your accounting structure is incorrect and requires immediate attention.
Step 4: Compare All Three Figures
Write down all three figures:
1. Adjusted bank balance: $________
2. Sum of client ledgers: $________
3. General ledger trust liability: $________All three must match exactly.
If they match, document your reconciliation:
Save bank statement
Print client ledger report
Print general ledger detail
Create reconciliation summary showing all three figures
Sign and date the reconciliation
File in chronological order for audit readiness
If they don't match, proceed to Step 5.
Step 5: Investigate and Resolve Discrepancies
When figures don't align, systematically identify the cause:
If bank balance ≠ trust register:
Unrecorded bank transactions (fees, interest, returned checks)
Duplicate entries in register
Transposition errors (e.g., $1,234 recorded as $1,324)
Deposits or checks recorded in wrong month
If sum of client ledgers ≠ bank balance:
Transactions posted to wrong client
Missing client ledger entries
Client costs not allocated to specific matters
Fees transferred without reducing client balance
If general ledger trust liability ≠ client ledgers:
Trust transactions posted to wrong general ledger account
Duplicate or missing journal entries
Timing differences between systems
Trust and operating account transactions confused
Document your investigation. Note what you found, how you corrected it, and what process change will prevent recurrence.
Never make adjusting entries to "force" reconciliation without understanding the root cause. Unexplained adjustments are red flags in audits.
Step 6: Document Everything
Create a reconciliation workpaper showing:
Reconciliation date
All three figures (bank, client ledgers, general ledger)
Confirmation they match
Any adjustments made with supporting documentation
Your signature and date
Storage in permanent file
Bar associations require maintaining these records for 5-7 years. For a complete breakdown of what to keep and how long, see our guide to IOLTA recordkeeping requirements. Organize chronologically for easy retrieval during audits.
Unmatched ledgers, missing client details, and delayed reconciliations all increase compliance risk for law firms managing client trust accounts.
Common Three-Way Reconciliation Mistakes
Even firms attempting monthly reconciliation make errors that compromise compliance:
Mistake 1: Reconciling bank to register only
This is a two-way reconciliation. It misses whether client ledgers match the bank balance, allowing one client's funds to cover another client's shortage - a serious ethics violation.
Mistake 2: Performing reconciliation irregularly
Monthly reconciliation isn't optional. Quarterly or annual reconciliation allows errors to compound and makes corrections exponentially harder.
Mistake 3: Not investigating small discrepancies
"It's only $5" quickly becomes "Where did $5,000 go?" Small errors indicate process failures that cause larger problems over time.
Mistake 4: Allowing negative client balances
Negative balances mean you've used one client's money for another client - immediate ethics violation requiring self-reporting in many jurisdictions.
Mistake 5: Trusting software without verification
Practice management software automates many tasks but doesn't prevent input errors, duplicate entries, or transactions posted to wrong clients. Always verify.
Mistake 6: No supporting documentation
Reconciliation without bank statements, client ledger reports, and general ledger printouts won't satisfy auditors. Paper trail is mandatory.
Mistake 7: Delegating without oversight
Even if staff performs reconciliation, an attorney must review and sign off monthly. Ultimate responsibility rests with the attorney.
When To Get Professional Help
Consider professional trust accounting support when:
Reconciliations consistently take longer than 90 minutes
You regularly find unexplained discrepancies
Multiple months are unreconciled
Staff turnover has created gaps in your process
Negative client balances have occurred
You're preparing for a bar audit
Recent rule changes in your jurisdiction require process updates
Professional bookkeepers specializing in legal trust accounting perform three-way reconciliation as part of standard monthly service, typically completing the process by the 10th of the following month with full documentation.
The cost - typically $800-$1,500 monthly depending on firm size -is negligible compared to penalties for non-compliance, which start at $5,000 for first violations and escalate to license suspension for repeated failures.
Trust Reconciliation Compliance Checklist
Use this monthly checklist to ensure complete reconciliation:
Reconciliation completed within 10 days of month-end
Bank statement obtained and reviewed line-by-line
Outstanding checks and deposits in transit identified
Adjusted bank balance calculated
Client ledger report generated as of month-end
All client balances reviewed (no negative balances)
Sum of client ledgers calculated
General ledger trust liability balance verified
All three figures match exactly
Any discrepancies investigated and resolved
Supporting documentation collected and filed
Reconciliation workpaper created and signed
Filed chronologically for audit readiness
Post this checklist where your bookkeeper or responsible staff member can reference it monthly.
Key Benefits of Monthly Law Firm Bookkeeping:
IOLTA Trust Compliance: Full monthly reconciliation aligned with bar association standards.
Three-Way Reconciliation: Consistent matching of bank statements, trust ledgers, and client balances.
Bar-Compliant Financial Reporting: Clear, audit-ready reports designed for legal practices.
Accounting Atelier’s boutique bookkeeping solutions deliver structured, proactive financial management built specifically for law firms - helping firms stay ahead of regulatory requirements and strengthen IOLTA account practices month after month.
Explore Monthly Law Firm Bookkeeping Packages ➔
Frequently Asked Questions
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Three-way reconciliation requires comparing three records monthly: the trust bank statement balance (adjusted for outstanding checks and deposits in transit), the sum of all individual client ledger balances, and the general ledger trust liability account. All three must match exactly to the penny. The process typically takes 60-90 minutes and must be completed within 10-15 days of month-end in most jurisdictions.
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The three components are: (1) the adjusted trust bank statement balance, which shows actual cash held in the trust account; (2) the sum of individual client ledger balances, representing total amounts owed to all clients; and (3) the general ledger trust liability account, which records the firm's accounting obligation to clients. When these three figures match, the trust account is in balance and compliant.
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State bars require monthly three-way reconciliation, typically within 10-15 days of month-end. Some jurisdictions require reconciliation within five business days. Quarterly or annual reconciliation violates ethics rules in nearly every state, even when no client funds are missing. Check your state bar's specific requirements, as some mandate particular reconciliation forms or procedures. For a deeper dive into state-specific rules, see our IOLTA compliance guide.
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When figures don't match, immediately investigate the cause before making any adjustments. Common issues include unrecorded bank transactions, deposits or checks posted to wrong clients, timing differences between systems, or errors in general ledger posting. Document your investigation and correction process. Never force balance through unexplained adjusting entries - this creates audit red flags and masks underlying problems.
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Required documents include: the complete trust account bank statement, trust account register or checkbook showing all transactions, client trust ledger report listing each client's balance, general ledger showing the trust liability account balance, and supporting documentation for any adjustments. Maintain these records for 5-7 years depending on your state's requirements. Organize chronologically for audit readiness.
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No. Negative client balances indicate you've used one client's funds to cover another client's shortage - a serious ethics violation in every jurisdiction. Some software allows negative balances but this doesn't make them compliant. If you discover negative balances, immediately deposit firm funds to eliminate the shortage, investigate the cause, document your correction, and determine whether self-reporting to your state bar is required.
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While staff can perform the technical reconciliation work, an attorney must review and approve it monthly. The attorney holds ultimate responsibility for trust account compliance under ethics rules - delegation doesn't transfer liability. Best practice: bookkeeper or paralegal completes reconciliation, attorney reviews supporting documentation and signs off, both maintain documentation showing oversight occurred.
