How is a trust account reconciliation statement prepared, and what does it contain?

Is the account you hold a trust account?

An account holds funds for others when the money in it belongs to clients or third parties and came to you because of the work you do for them. The governing rule usually defines this by activity. Minnesota's lawyer rule, for example, says: "All funds of clients or third persons held by a lawyer or law firm in connection with a representation shall be deposited in one or more identifiable trust accounts". Washington's real estate rules apply their trust procedures "to funds received by the firm in connection with real estate sales, business opportunity transactions or options." North Carolina requires that "All entrusted property shall be identified, held, and maintained separate from the property of the lawyer".

To decide whether your account is one of these, ask three questions:

• Does any of the money belong to someone other than the business, even for a day, such as a retainer not yet earned, an earnest money deposit, settlement proceeds or rent collected for an owner?
• Did you receive it because of a licensed or registered activity (law, real estate brokerage, property management, escrow and the like)?
• Does the body that licenses you publish rules for accounts holding client funds?

If the answer to the first two is yes, treat the account as a trust account and find your licensing body's rule before you prepare anything. Every requirement below is an example from one state and one profession. None is a national rule, and your own authority's rule governs where it differs.

Which records do you need before you start?

Gather three record sets for the same period end date.

The bank statement for the trust account. Minnesota's lawyer recordkeeping appendix lists bank statements, canceled checks (if the bank provides them), transfer confirmations and duplicate deposit slips among the required records.

Your ledger for the account as a whole. Minnesota calls it a check register: "A check register for each trust account that chronologically shows all deposits and checks and the balance of funds remaining in the account." North Carolina calls the same record the general ledger, and Washington's broker rules refer to the trust account check register or bank control account.

A ledger for each client or matter. Minnesota requires "A subsidiary ledger for each client matter in which the attorney deposits funds into a trust account." North Carolina requires, for a general trust account, "a ledger containing a record of receipts and disbursements for each person or entity from whom and for whom funds are received" together with the current balance held for each.

The client ledgers are not optional extras. A reconciliation built only from the bank statement and the account register can agree in total while one client's balance has gone below zero. The pooled bank balance cannot reveal that, but the client ledgers can.

What balances must the statement present, and what must they prove?

A trust reconciliation presents three figures as of the same date and shows that they match.

1. The adjusted bank balance. Minnesota: "The adjusted bank statement balance is determined by adding the outstanding deposits and subtracting the outstanding checks from the monthly bank statement balance."
2. The register or general ledger balance for the trust account as of that date.
3. The total of the client ledgers. Minnesota requires "A trial balance of the subsidiary ledgers, performed on a monthly basis, which shows each client matter for which the attorney is holding funds in a trust account", with each client's balance and the total. Where your rule lets you keep a small amount of your own money in the account, that money has its own ledger — North Carolina's administrative ledger, Washington's open account — and it belongs in this total.

The agreement is the point of the document. Minnesota requires "A reconciliation of the check register balance, the subsidiary ledger trial balance total, and the bank statement balance performed on a monthly basis". North Carolina's quarterly report "shall show all of the following balances and verify that they are identical". Washington's broker rule states that "The reconciled real estate trust bank account balance must be equal at all times to the outstanding trust liability to clients and the funds in the "open account" ledger".

The client total is not a simple net sum. North Carolina totals it "by listing and totaling the positive balances in the individual client ledgers and the administrative ledger maintained for servicing the account". Minnesota says "A negative client subsidiary ledger balance may not serve to reduce the trial balance total." Under both rules, a client in deficit cannot hide behind another client's surplus. When the positive balances add up to more than the bank holds, the difference is a shortage.

Which reconciling items can appear, and what supports each one?

A reconciliation statement "identifies and explains differences between two sets of records, such as a bank balance and the general ledger, without changing accounting records." In a bank reconciliation the normal items are timing differences, "such as deposits in transit and uncashed checks". North Carolina's formula reaches further than timing alone: the adjusted bank balance is "determined by adding outstanding deposits and other credits to the ending balance in the monthly bank statement and subtracting outstanding checks and other deductions from the balance in the monthly statement".

The support below is standard reconciliation practice rather than a quoted rule; your authority may require more.

• Deposit in transit (outstanding deposit). It must already be in the register and on a client ledger, dated on or before the statement date. Keep the deposit slip or transfer confirmation, and confirm the item clears on the next bank statement. Minnesota requires that "Checks, fund transfer confirmations and deposit slips must be annotated with the identity of the affected client."
• Outstanding check or transfer. It must be recorded in the register and on the client ledger it was drawn for, with a check number or transfer reference. Keep a listing, and follow up on items that stay outstanding across several periods.
• A bank-side error the bank has acknowledged. Keep the bank's written acknowledgement and the item it relates to, and confirm the correction appears on the next statement.
• Bank charges or interest not yet recorded. These appear on the bank statement but not in your books. Record them in the register and on the ledger your rule assigns them to, then reconcile again. Do not carry them as permanent reconciling items. Minnesota, for example, has lawyers keep a separate ledger for their own nominal funds that "should also record any monthly service charges not offset or waived by the bank in the same month."

The statement exists to make each difference visible so that someone can "determine which of the reconciling items may be invalid and in need of adjustment". Any item that is not a timing difference, or a bank-side error the bank has acknowledged, with a document behind it is an unexplained difference, not a reconciling item.

What conditions is the statement designed to reveal, and what do you do when one appears?

A client or matter balance in deficit. Money was paid out for a client beyond what that client had on deposit, so other clients' money covered the payment. Minnesota states the standing rule: "An attorney shall not disburse funds from the trust account that would create a negative balance in any subsidiary ledger." Treat a deficit as a shortage (see the shortage section below). Do not wait for the next period.

The business's own money in the account. The rules cited here allow only a small amount, if any; check what yours allows. Minnesota permits "funds of the lawyer or law firm reasonably sufficient to pay service charges" and caps it: "The amount of an attorney's own funds in a trust account shall not exceed $200." If the statement shows more business money than your rule allows, transfer the excess out with documentation, and record it on the ledger that tracks the business's funds.

Earned amounts not withdrawn. Fees or commissions that have been earned but are still in trust are business money sitting in a client account. North Carolina's rule is that "the lawyer shall withdraw the amounts to which the lawyer is or becomes entitled." Washington's broker rules require a separate trust check payable to the firm "for each commission earned, after the final closing". When the statement shows an earned amount still sitting in the account, withdraw it the way your rule prescribes and record it on the client ledger. Under both lawyer rules cited here, any amount whose entitlement the client disputes stays in the account until the dispute is resolved, and Minnesota also requires written notice to the client.

Agreement in total does not clear these conditions. Check each one every time, even when the three balances match.

Who sets the frequency, sign-off and retention?

Your licensing body sets them. You do not choose them. They differ by state and profession, as these examples show:

North Carolina states the sign-off and retention in one line: "The lawyer shall review, sign, date, and retain a copy of the reconciliations of the general trust account for a period of six years".

A cell marked "Rule-specific" means the requirement comes from other provisions of that authority's rules. Read them before you set your process. If you hold client funds in more than one state or under more than one license, meet each authority's rule for the accounts it governs.

Can a bookkeeper prepare it, and what stays with the account holder?

Yes, the work can be delegated. Responsibility generally cannot. In North Carolina the rule places review, signature, dating and retention on the lawyer; it does not shift them to whoever prepared the report. North Carolina also separates the duties: a delegated check signer or transfer authority must be "an employee who is not responsible for performing monthly or quarterly reconciliations and who is supervised by a lawyer." Washington makes the designated broker responsible for the monthly trial balance.

When preparation is delegated, the account holder should still do these things personally:

• Read the finished statement and confirm the three balances match the bank statement, register and ledger trial balance attached.
• Scan the ledger listing for any negative, stale or unexpected balance, and for business money or earned amounts left in the account.
• Question every reconciling item that is not a routine timing difference.
• Sign and date the statement where the governing rule requires it, and confirm it is filed with its support.

What do you do when the statement will not agree?

Stop and investigate. Do not force the statement to agree. Accounting practice keeps two tools separate: "A correcting journal entry adjusts the accounting records to fix an error, omission, or misclassification discovered during reconciliation or review." A correcting entry is made only after you have found the specific error and can document it. It is never a way to make the totals match.

Work through the difference in this order:

1. Confirm all three figures use the same cut-off date and the same account.
2. Check that every deposit and disbursement on the bank statement appears in the register and on exactly one ledger, and the reverse.
3. Re-add the ledger trial balance, and list any negative balance separately instead of netting it.
4. Look for bank-side items not yet recorded, such as fees, interest, returned deposits or transfers.
5. Record the correction for each error you find, with its support, and reconcile again.

If a difference remains that you cannot trace to a documented cause, leave it on the statement as an unexplained difference, escalate it to the account holder, and keep investigating. If the unexplained difference means the account holds less than the total owed to clients, it is a shortage from the moment you find it, and the duties in the next section apply straight away — do not wait until the cause is known. Never enter it as an adjustment without support. Posting an unsupported entry to the register or a client ledger turns a discrepancy you can see into one no one will find.

What happens when there is a shortage?

A shortage exists when the account holds less than the total owed to clients. That includes the case where the net total agrees but one client ledger is negative. A shortage triggers duties that the rules impose. They are not a matter of choice, and the body that licenses you decides what they are. Some examples:

• North Carolina lawyers: "A lawyer who discovers or reasonably believes that entrusted property has been misappropriated or misapplied shall promptly inform the North Carolina State Bar's Trust Account Compliance Department." The same rule adds two conditions: "Discovery of intentional theft or fraud must be reported to the Trust Account Compliance Department immediately", and where "an accounting or bank error results in an unintentional and inadvertent use of one client's trust funds to pay the obligations of another client, the event must be reported unless the misapplication is discovered and rectified on or before the next quarterly reconciliation required by Rule 1.15-3(d)(1)". Lawyers there must also file a bank directive requiring the bank "to report to the executive director of the North Carolina State Bar when an instrument drawn on the account is presented for payment against insufficient funds".
• Washington real estate firms: when bank charges exceed interest and leave the balance below trust liability, "the designated broker shall within one banking day after receipt of such notice, deposit funds from the firm's business account or other nontrust account to bring the trust account into balance with outstanding liability".

Find the replenishment and reporting terms in your own authority's rule, and follow them as written. Do not quietly cover the shortage with a book entry. If a shortage raises questions about your own position or a possible disciplinary matter, that calls for licensed counsel.

What does a finished statement look like, and how does a deficit show up?

Here is an invented example for one pooled trust account, dated 31 March.

The register balance is also 46,500.00. At first glance, bank, register and net client total all agree. But Client C's ledger is 1,500.00 below zero, so 1,500.00 of other clients' money was paid out for Client C. Under a rule that totals only positive balances, the client total is 30,000.00 + 18,000.00 = 48,000.00. That is 1,500.00 more than the adjusted bank balance of 46,500.00. The statement must show that 1,500.00 as a shortage, not as agreement.

A statement a reviewer or examiner can follow without asking you questions contains:

• Header. Account holder, bank name, account name and number, whether the account is pooled, and the statement date. California's broker rule, for example, requires the reconciliation record to "identify the bank account name and number, the date of the reconciliation" along with each principal or transaction and the broker's liability to each.
• Bank section. Statement balance, each outstanding deposit and check listed individually with date, reference and client, and the adjusted balance.
• Register section. The register or general ledger balance at the same date.
• Ledger section. Every client or matter with its balance, any administrative or open-account ledger your rule requires, the positive-balance total including that ledger, and any negative balance shown separately.
• Agreement line. The three balances side by side, the difference (zero, or the amount and its description), and a note on any business money or earned amounts found.
• Actions. What was corrected, what remains open, and what was escalated or reported.
• Sign-off. Preparer, reviewer, and account holder signature and date where the rule requires them.

Checklist for each period:

1. Pull the bank statement, register and all ledgers to the same date.
2. Adjust the bank balance for the outstanding deposits and checks and any other documented credits or deductions.
3. Prepare the ledger trial balance — every client or matter plus any administrative or open-account ledger your rule requires — without netting negatives.
4. Compare the three balances and investigate any difference.
5. Check for client deficits, excess business money and earned amounts not withdrawn.
6. Act on any shortage under your authority's rule.
7. Obtain the review and signature your rule requires.
8. File the statement with its support.

What do you keep with the statement, and for how long?

Keep enough to let someone re-perform the reconciliation later: the bank statement, the register for the period, the ledger trial balance, the outstanding item lists with their evidence, deposit slips and transfer confirmations, the corrections you made with their support, and any escalation or report. Keep them together with the signed statement.

The retention period is whatever your authority sets, measured the way it says. North Carolina requires that the reconciliations be kept for six years. Minnesota's rule that computerized trust records be printed or saved each month is a requirement about the form the records take, not a retention period. Where you are unsure which period applies, use the longest period required by any authority that governs the account.