Attorney Bookkeeping & The Importance of Three-Way Reconciliation for Trust Accounts

To comply with attorney bookkeeping regulations, complete and accurate records are necessary. Keeping and reconciling these records are the “accounting” portion of an attorney's responsibility for client trust accounting.

Per Rule 1.15 (d)(3) and section (e), reconciliation of client trust account records must be completed on a monthly basis. This process should be completed for each client trust account, with reconciliation records retained as proof.

Not all attorneys are trained in accounting and bookkeeping practices; you may need the assistance of a bookkeeper.

Record-keeping and Maintenance with Accounting Software for Attorney Bookkeeping

Record-keeping for client trust accounts consists of both bank-created and attorney-created records. Rule 1.15 outlines the records to consist of: 

• Bank Statements of deposits, withdrawals, and canceled checks 
• Attorney-created client trust account records, including client ledger, bank charges ledger, and account journal. 

How attorneys keep these records is not mandated, so long as each attorney has a system that works to satisfy their fiduciary obligations set out in Rule of Professional Conduct 1.15. Paper record-keeping is fine, as is digital. Multiple computerized accounting systems and technologies are available to assist in attorney bookkeeping. As with many sectors, technology has changed how efficiently tasks can be completed. It offers advantages regarding bookkeeping for lawyers by saving hours spent on manual record-keeping and reconciliation. With a myriad of modern accounting software, attorneys no longer have to store all records on paper in their offices. 

There are many technicalities and minutiae regarding attorney bookkeeping. Attorneys often have more specific needs regarding which features they need in accounting software. It isn’t uncommon for attorneys practicing bookkeeping to utilize multiple software. It is also necessary to know that there is, in fact, a difference between Legal Accounting Software and Bookkeeping Software for attorneys and law firms. The below is, across the board, which services are typically offered in each software category. 

What Does Accounting Software Do? 

• Analyzes business money standings and cashflow 
• Will assist in informing how the business is doing 
• Prepare financial statements 
• Separate profits from income
• Manage financial information 

What Does Bookkeeping Software Do?

• Records legal and financial transactions in the Records of Original Entry and into ledgers ● Perform bank reconciliation
• Balance accounts 
• Create invoices 
• Record payment and expense transactions 

While some accounting software includes bookkeeping features, not all of them do, as an attorney or law firm usually requires both sets of tasks completed, it isn't uncommon for firms to utilize both or enlist the help of a bookkeeper for expertise and efficiency. 

Other things to consider when keeping the records include information safety and data corruption. When choosing a modern technology, equipment failure, natural disasters, cyberattacks, and technological miscommunication can affect whether modern accounting software or handwritten books are best. What is most important is choosing a method that will help you avoid mistakes and hinder the progress of fulfilling the fiduciary responsibilities owed to clients. 

What is the Three-Way Reconciliation Process?

Whichever method of record-keeping an attorney chooses, the goal is accuracy in completing reconciliation and determining the Corrected Month Ending Balance. As this balance lets you know exactly how much money was in the client's trust bank account on the final day of the month, the process must be completed accurately to remain in compliance with Rule 1.15. 

The three-way reconciliation process uses the mandated record-keeping tools to ensure all financial information matches. Attorneys are expected to complete three-way reconciliation regardless of the number of trust accounts they maintain. Additionally, in compliance with Rule 1.15(d)(3), California attorneys must do this every month. The three records needed to complete the reconciliation are the following: 

• Bank charges ledger or client trust account bank statements, including account deposits, charges, withdrawals, and any interest credited to your account from the bank during the month. Note: In the event of an IOLTA account, bank statements may show the interest paid to the state bar. These should not be added to the account journal.
• Client ledger is the written ledger required for each client’s funds. Client ledgers are equivalent to keeping an individual checkbook for every client. Whether the funds are kept in a pooled IOLTA account or not. The client ledger groups and lists all transactions together by the client, including the transaction date, the amount of the transaction, and the purpose of payment. 
• An account journal, sometimes called the trust ledger, serves as a written journal for the individual client trust bank accounts. This is similar to the client ledger, but it keeps track of details on payouts, which clients you paid or received money for, and shows the new account balance post each transaction. 

These three essential records must be checked against each other to perform reconciliation. Since it is unlikely to record the same mistake three times, attorneys will likely catch them during three-way reconciliation. After every monthly reconciliation, attorneys must create written records showing the completed reconciliation. Handbook on Client Trust Accounting for California Attorneys Handbook on Client Trust Accounting for California Attorneys 

By the way of Rule 1.15(d)(3), reconciliation should look like this 

• Every client trust account transaction should be recorded twice. Once in the client ledger and once in the account journal. From here, the client ledger and the account journal are checked against each other. 
• Ensure the client ledger and agreeing account journal match the bank statements. 
• Reconcile the client ledger, account journal, and bank statements to ensure they agree. It is recommended to use an adding machine or calculator for a physical printout of the mathematics to easily backtrack if miscalculation occurs. 
• Enter correct month-end balances into the account journal and client ledger. 

A note about completing the reconciliation monthly: certain delays are expected that attorneys and law firms should be mindful of. For example, sometimes banks take a few weeks after a month ends to send out statements and to mail checks. These sorts of happenings mean that attorneys cannot reconcile with the statement in front of them. It’s necessary to have an adjusted account journal balance, minusing the transactions that are still pending. Unposted transactions should be separately notated as “Deposits and Withdrawals Not Posted by the Bank.” 

Throughout the process of attorney bookkeeping, record-keeping and reconciliation must be done meticulously. A miscalculation in one record is likely to confuse the monthly reconciliation process. Completing three-way reconciliation with accurate client ledger, account journal, and bank statement records will ensure that California attorneys remain in compliance with Rule 1.15.

Attorney Bookkeeping and Three-Way Reconciliation: Final Thoughts

If you want more information on attorney bookkeeping, three-way reconciliation, or any other financial concepts or tips, get in touch with talented Orange County accountants and bookkeepers at SmartBean®!