Trust Account Reconciliation: The Complete Guide for Law Firms
Updated November 2025
Trust account reconciliation is the monthly process of verifying that your law firm's IOLTA account balance matches both your individual client ledgers and your master trust ledger. State bar rules in all 50 states require this reconciliation, and failure to complete it accurately is one of the leading causes of attorney discipline. This guide walks through the exact steps, common failure points, and the downstream consequences of getting it wrong.
What Trust Account Reconciliation Actually Requires
Trust account reconciliation confirms three numbers match: what the bank says you have, what your client ledgers say you owe each client, and what your master trust ledger shows as the total. When these three figures align, your trust accounting is in balance. When they don't, you have a problem that needs immediate attention.
The bank statement reflects actual cash in the account. Your client ledgers track funds held for each individual client - retainers received, costs advanced, fees transferred out. Your master trust ledger aggregates all client ledgers into one total. Three-way reconciliation formalizes this matching process and creates the documentation your state bar expects.
Reconciliation isn't optional. Rule 1.15 of the Model Rules of Professional Conduct - adopted in some form by every state - mandates that attorneys maintain complete records of client funds and perform regular reconciliations. The frequency requirement varies by jurisdiction, but monthly reconciliation represents the standard practice and the minimum defensible position if your records face scrutiny.
The Three Components You're Reconciling
Bank Statement Balance
Start with your ending bank balance for the month. This figure comes directly from your financial institution and represents the actual cash sitting in your IOLTA or client trust account. Before you can use this number, you need to account for timing differences - checks you've written that haven't cleared, deposits in transit, and any bank fees or interest.
Your adjusted bank balance = ending statement balance + deposits in transit - outstanding checks ± bank adjustments.
Client Ledger Total
Each client with funds in trust has an individual ledger showing every transaction: initial retainer deposit, replenishments, cost payments, fee transfers to your operating account. Sum every client ledger with a positive balance. Clients with zero balances don't factor into this calculation - they have no funds in trust.
This total represents what you owe clients in aggregate. If you closed the firm tomorrow and returned all client funds, this is the check you'd need to write.
Master Trust Ledger Balance
Your master trust ledger (sometimes called a trust journal or trust register) records every transaction into and out of the trust account chronologically, regardless of client. The running balance on this ledger should equal your client ledger total at any point in time.
When all three match, reconciliation is complete. When they don't, investigation begins.
Step-by-Step Reconciliation Process
Step 1: Gather Documents
Pull your bank statement for the reconciliation period. Print or export your client ledger balances as of the statement ending date. Pull your master trust ledger through the same date. You need all three documents reflecting the exact same time period.
Step 2: Reconcile the Bank Statement
Start with the ending bank balance. Add any deposits made before month-end that don't appear on the statement (deposits in transit). Subtract any checks written before month-end that haven't cleared (outstanding checks). The result is your adjusted bank balance.
Keep a running list of outstanding checks. Checks outstanding for more than 90 days signal a problem - the payee may have lost the check, the payment may be in dispute, or the check may have been sent to a wrong address. Stale checks require follow-up, not just notation.
Step 3: Calculate Client Ledger Total
Run a report showing every client ledger balance as of the reconciliation date. Verify no client shows a negative balance - negative balances indicate you've paid out more than that client deposited, which means you've used another client's funds. This is commingling, and it's a serious compliance violation.
Sum all positive client balances. This is your client ledger total.
Step 4: Verify Master Ledger Balance
Your master trust ledger should show a running balance. Confirm the ending balance as of your reconciliation date. This figure should equal your client ledger total from Step 3. If it doesn't, you have a posting error somewhere - a transaction recorded to the master ledger but not to a client ledger, or vice versa.
Step 5: Compare All Three
Adjusted bank balance = Client ledger total = Master trust ledger balance.
If all three match, document the reconciliation, sign and date it, and file it. If they don't match, you have work to do.
“The longer you delay reconciliation, the harder - and riskier - it becomes to fix.”
When the Numbers Don't Match
Reconciliation discrepancies fall into three categories: timing differences, posting errors, and actual shortages.
Timing Differences
A deposit made on the last day of the month may not appear on the bank statement if it was made after the statement cutoff. A check mailed on the 30th may not clear until the following month. These timing differences explain why your bank balance differs from your books - but they should fully account for the difference. If timing adjustments don't reconcile the accounts, the problem lies elsewhere.
Posting Errors
A transaction recorded to the wrong client ledger throws off individual balances while potentially keeping the total correct. A transaction recorded to the master ledger but not to any client ledger (or the reverse) creates a discrepancy between ledger total and master balance. Transposition errors - recording $1,500 as $1,050 - create smaller but equally problematic discrepancies.
Finding posting errors requires transaction-by-transaction comparison. Start with the largest transactions and work down. The error usually hides in a recent entry, not six months back.
Actual Shortages
When timing and posting errors don't explain the discrepancy, you may have an actual shortage. Causes range from bank errors (rare but possible) to fraud (internal or external) to mistaken disbursements. A shortage means client funds aren't where they should be, and your obligation is immediate: identify the cause and restore the funds.
Shortages require documentation and, depending on your jurisdiction and the amount, may require disclosure to your state bar. Covering a shortage with personal funds is appropriate and expected. Ignoring a shortage or hoping it resolves itself compounds the problem exponentially.
Skipping reconciliation isn’t harmless - it’s a direct path to regulatory action.
The Compliance Risk of Skipping Reconciliation
Attorneys who skip monthly reconciliation or perform it carelessly face two categories of risk: detection risk and harm risk.
Detection Risk
Random audits happen. Client complaints trigger investigations. Malpractice claims open your records to scrutiny. Estate matters and firm dissolutions require accountings. At any of these moments, your trust accounting either demonstrates compliance or reveals problems.
State bars can and do audit trust accounts without cause. Some jurisdictions require annual certifications that you've maintained proper records. The IOLTA compliance requirements in your state specify exactly what documentation you need to maintain and for how long.
Harm Risk
Without reconciliation, errors compound. A $500 posting error in January becomes a $3,000 discrepancy by June if transactions continue building on the wrong foundation. A small shortage becomes a large shortage as fees transfer out and costs get paid. By the time someone notices, the problem may be severe enough to threaten client matters, trigger bar complaints, or require personal funds you don't have available.
Reconciliation catches problems when they're small and fixable. Skipping reconciliation lets problems grow until they become crises.
Reconciliation Frequency and Documentation
Monthly Minimum
Every state expects at least monthly reconciliation. Firms handling high transaction volumes may reconcile weekly or even daily. The question isn't whether monthly reconciliation is required - it is - but whether your transaction volume warrants more frequent review.
Documentation Requirements
Your reconciliation should be a physical or digital document showing:
Reconciliation date
Bank statement ending balance
Adjustments for deposits in transit and outstanding checks
Adjusted bank balance
Client ledger total with list of individual balances
Master trust ledger balance
Notation that all three figures match (or explanation if they don't)
Signature and date of person performing reconciliation
Keep reconciliation records for at least five years. Some jurisdictions require seven. When in doubt, keep everything. For a complete breakdown of what to retain and how to organize it, see our guide to IOLTA recordkeeping requirements.
The cost of catching up later is far greater than staying current now.
Common Reconciliation Failures
Reconciling to the Wrong Date
Your bank statement ends on the 31st. Your accounting software shows balances as of today, the 15th of the following month. You compare them and wonder why they don't match. Always reconcile as of the same date across all three components.
Ignoring Outstanding Checks
That check you wrote six months ago that never cleared? It's still affecting your reconciliation. Either follow up with the payee, void the check and reissue, or escheat the funds according to your state's abandoned property laws. Perpetually outstanding checks indicate unfinished business.
Negative Client Balances
A negative balance on any client ledger means you've spent more for that client than they deposited. The funds had to come from somewhere - meaning another client's money covered the shortfall. This is the definition of commingling, and it's exactly what trust account rules prohibit. Negative balances require immediate correction: either collect the shortage from the client or replace it from your operating account.
Reconciling Only Two Components
Matching your bank balance to your client ledger total isn't enough. The master trust ledger must also match. Skipping this step means you might have posting errors between individual client ledgers that happen to cancel out in the total. Three-way means three-way.
Software and Automation
Legal practice management platforms like Clio and MyCase include trust accounting modules that automate much of the reconciliation process. These tools maintain client ledgers, generate master trust reports, and flag discrepancies automatically.
Automation helps but doesn't replace understanding. Software can tell you the numbers don't match. It can't tell you why, and it can't make judgment calls about how to resolve discrepancies. The attorney remains responsible for the accuracy of trust accounts regardless of what tools assist the process.
QuickBooks and general accounting software can track trust accounts but lack law-firm-specific features like matter-based ledgers and IOLTA compliance reporting. If you're using general software, you'll need supplementary tracking - often spreadsheets - to maintain proper client ledgers.
Software is helpful - but not a substitute for bar-compliant reconciliation.
When to Get Help
Signs You Need Professional Bookkeeping Support:
Reconciliation takes more than two hours monthly
You've had unexplained discrepancies in consecutive months
Your transaction volume exceeds 50 trust transactions monthly
You're unsure whether your current process meets bar requirements
You're preparing for a known audit or compliance review
Trust accounting errors carry professional consequences that general bookkeeping for law firms errors don't. The cost of specialized support is trivial compared to the cost of bar discipline, malpractice exposure, or the stress of discovering a significant shortage during a client matter.
What keeps your firm compliant isn’t automation - it’s documentation.
Why Law Firms Need a Dedicated Trust Accounting System
A dedicated accounting system, managed by an experienced legal bookkeeper, provides structure and transparency for all trust account activities. This safeguards the firm against unintentional commingling, overdrafts, or missed deadlines that can result in disciplinary action.
Regular reconciliation and audit trails help maintain client trust and demonstrate accountability to regulators. Consistent documentation and up-to-date records make responding to audits straightforward and minimize operational disruption.
By investing in professional expertise and robust systems, law firms stay compliant, reduce stress for attorneys, and allow the legal team to focus on client work without fear of compliance gaps.
Need a reliable trust accounting system you don’t have to second-guess?
At Accounting Atelier, we specialize in proactive, audit-ready bookkeeping for law firms. From monthly reconciliations to IOLTA oversight, we handle the details so you can focus on practicing law - not fixing records.
Frequently Asked Questions
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State bar rules require IOLTA account reconciliation at least monthly. Firms with high transaction volumes - more than 50 transactions monthly - benefit from weekly reconciliation to catch errors before they compound. The reconciliation should occur within the first two weeks following each month-end while transactions are fresh and documentation is accessible.
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An unbalanced reconciliation requires immediate investigation. Start by verifying all transactions posted correctly to both client ledgers and the master trust ledger. Check for timing differences like deposits in transit or outstanding checks. If posting and timing adjustments don't resolve the discrepancy, you may have an actual shortage requiring documentation and potential disclosure to your state bar.
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Trust account reconciliation requires three documents dated to the same period: your bank statement showing the ending balance, a report of all individual client ledger balances, and your master trust ledger balance. You'll also need records of outstanding checks and deposits in transit to calculate your adjusted bank balance.
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QuickBooks can track trust account transactions but lacks law-firm-specific features like matter-based client ledgers and IOLTA compliance reporting. Firms using QuickBooks typically need supplementary spreadsheets or reports to maintain proper client-level tracking. Legal practice management software like Clio or MyCase provides integrated trust accounting designed for bar compliance requirements.
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Three-way reconciliation matches three figures: your adjusted bank balance, the sum of all individual client ledger balances, and your master trust ledger balance. All three numbers must match for reconciliation to be complete. This process verifies both that your bank reflects actual funds and that your internal records accurately track which clients own those funds.
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Retain trust account reconciliation records for a minimum of five years, though some jurisdictions require seven years. When in doubt, keep records indefinitely - storage costs are minimal compared to the consequences of missing documentation during an audit or investigation. Digital records should be backed up and accessible throughout the retention period.
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A negative client ledger balance means disbursements for that client exceeded deposits - you've spent money the client never provided. This indicates commingling: other clients' funds covered the shortfall. Negative balances require immediate correction either by collecting the shortage from the client or replacing it from your operating account. Never leave a negative balance unresolved.
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Someone other than the person making deposits and writing checks should perform reconciliation when possible. This separation of duties provides internal control against errors and fraud. Solo practitioners handling their own reconciliation should review each transaction against source documents and consider periodic external review by a legal bookkeeper or accountant familiar with bar requirements.
