Three-way trust reconciliation, explained

The three figures

A three-way reconciliation compares the same pool of money measured three different ways. If the money is where the records say it is, all three land on the same number.

• The adjusted bank balance — the statement balance, plus deposits not yet shown, minus cheques not yet cashed.
• The trust ledger control — every trust entry you have recorded, credits less debits.
• The sum of client balances — each client's individual trust ledger, added up.

The comparison is required monthly under By-Law 9, and the requirement is not merely that you produce it but that the figures agree.

Why three and not two

Comparing the bank to the ledger catches errors in recording. Comparing the ledger to the client listing catches something different: money recorded correctly in total but attributed to the wrong client.

That second failure is the dangerous one, because the trust account balances perfectly while one client's money quietly funds another's disbursement. Only the third figure exposes it — which is precisely why a two-way reconciliation is not sufficient.

The usual causes of a difference

• Timing. A deposit made on the last day of the month, or a cheque issued and not yet presented, appears in one figure and not another. These are reconciling items, not errors — but they must be listed, not ignored.
• A transaction recorded in the wrong direction. A withdrawal entered as a deposit moves the ledger by twice the amount, so the difference is exactly double the transaction.
• A transaction posted to the wrong client. The bank and the control agree; only the client listing is out.
• Bank charges or interest posted by the bank but never entered.

Doing it in a way that stays done

The practical difficulty is rarely the arithmetic. It is that a reconciliation prepared once, weeks after the fact, tends to surface a difference nobody can now explain — the supporting detail has gone.

Firms that keep this painless generally do the same three things: reconcile on a fixed day rather than when there is time, resolve differences in the month they appear, and keep the bank statement attached to the comparison so the next reader is not searching for it.