Three-Way Trust Reconciliation: What It Is and How to Do It Monthly

A three-way reconciliation proves that three numbers agree on the same date: the trust bank balance adjusted for items that haven't cleared, the balance in your trust register, and the total of every individual client or owner ledger. When all three match, every dollar in the account is accounted for and assigned to the right person. Many state bars and real estate commissions expect it monthly, but the rules vary by state.

The three numbers, and why all three matter

A normal bank reconciliation compares two things: the bank statement and your books. A trust account needs a third check, because the money in it belongs to many different people. Three balances, all as of the same date, have to agree.

1. The adjusted bank balance. The ending balance on the trust bank statement, plus deposits in transit, minus outstanding checks and anything else that hasn't cleared.
2. The trust register balance. The running balance in your trust journal or checkbook register, the record of every deposit and disbursement in the account.
3. The total of the individual ledgers. The sum of every client's balance for a law firm, every owner, tenant deposit and reserve balance for a property manager, or the earnest money held on each transaction for a brokerage.

The bank-to-register match proves your records agree with the bank. The third number proves the money is assigned to the right people. A two-way reconciliation can balance perfectly while one client's balance is overstated and another's is short. Only the ledger total, checked against the other two, catches that.

Who needs a three-way reconciliation

Anyone who holds other people's money in a trust or escrow account. The most common are:

• Law firms. IOLTA accounts and any other client trust accounts holding retainers, settlement funds and cost advances. Our bookkeeping for attorneys keeps that money apart from the firm's operating books.
• Property managers. Trust accounts holding rent, owner reserves and tenant security deposits. Some states require deposits to sit in their own account, which then needs its own reconciliation. See our property manager bookkeeping page.
• Real estate brokerages. Escrow or trust accounts holding earnest money until closing, where the brokerage holds it at all. In many areas a title or escrow company holds it instead. See our brokerage bookkeeping page.

How often you must reconcile, what the report must show and who signs it vary by state, so check your state bar's or real estate commission's rules.

A worked example

Say a law firm's trust account holds money for three clients on March 31. Client A has $30,000, Client B has $15,000 and Client C has $9,000. A $5,000 retainer from Client C was deposited on March 31 but won't show on the bank statement until April, and a $3,000 check paid from Client B's funds hasn't cleared yet. Both are already in the register and on the client ledgers.

All three agree, so the month reconciles. The deposit in transit and the outstanding check go on the report by date, amount and client, and both should clear next month. If one is still sitting there a month or two later, it needs a look.

How to do it each month

1. Close the month in your software. Make sure every deposit, disbursement and transfer through month end is entered, and don't let anyone back-date entries after you reconcile.
2. Reconcile the bank to the register. Match every line on the trust bank statement to the register. List deposits in transit and outstanding checks by date, amount and payee, and calculate the adjusted bank balance.
3. Run the individual ledger report. Pull every client, owner or tenant balance as of the same date and total it. Practice software like Clio, MyCase and PracticePanther keeps client trust ledgers; property software like AppFolio, Buildium and Rent Manager keeps owner and tenant ledgers.
4. Compare the three numbers. If the adjusted bank balance, the register and the ledger total agree, move on. If not, find the difference before you do anything else.
5. Scan for negative balances. Look at every individual ledger, even when the totals agree. A negative balance is netted into the total, so all three numbers can match while one person's money is covering another's.
6. Fix errors with a dated, explained entry. Never plug a difference to make it balance. Correct the actual mistake and note what happened.
7. Review, sign and save. The attorney or broker reviews the report, signs and dates it, and the whole package goes on file.

Why the three numbers disagree

When the numbers don't match, look here first.

• Uncleared checks and deposits in transit. These are timing differences, not errors, and they belong on the report as reconciling items. A check that's been outstanding for months needs follow-up with the payee, and what to do with money you can't deliver depends on your state's rules.
• Posting errors. A deposit recorded to the wrong client, a transposed amount, a disbursement entered twice or not at all, or an entry dated in the wrong month. Depending on the mistake, the register drifts from the bank or the ledgers drift from the register.
• A client or owner ledger goes negative. You paid out more for someone than they had in trust, often by disbursing against a deposit that hadn't cleared. If the payment never got posted to a ledger, the numbers disagree. If it did, they can still agree, which is why the negative balance scan matters. Either way, someone else's money covered the gap, and the attorney or broker needs to know right away.
• Earned fees left in trust. If an earned fee transfer is recorded in your software but the money never moves, the bank shows more than the register. If the money moves but nobody records it against the client, that client's ledger is overstated. Leaving earned fees in trust too long can be treated as commingling in many states.
• Bank fees and charges. A service charge, wire fee, check order or card processing fee taken from the trust account lowers the bank balance with no client to charge it to. These are the firm's or brokerage's costs. Some states let you keep a small amount of your own money in trust to cover them, so check your state's rules.
• Bounced deposits. A client or tenant check recorded as a deposit and then returned by the bank. Reverse it on the register and the ledger, and don't disburse against it.

What to keep on file each month

A reconciliation is only as good as the paper behind it. For each trust account, each month, keep:

• The bank statement, with check images and deposit detail
• The bank-to-register reconciliation, with deposits in transit and outstanding checks listed by date, amount and payee
• The trust register for the month
• The individual ledger report as of month end, with its total
• The three-way summary showing all three balances side by side
• Notes and correcting entries for any difference, with how and when it was resolved
• Backup for earned fee transfers and disbursements, such as invoices, settlement statements, owner statements or closing statements
• Who prepared it, who reviewed it, and the dates

How long you keep these records is set by your state, so keep them at least as long as your rules require.

Law firms, property managers and brokers: what's different

The method is the same, but the ledgers look different.

• Law firms keep a ledger for each client, and often for each matter. Interest on pooled IOLTA funds goes to a state program, not the firm or the client, so it doesn't belong on client ledgers. Larger or longer-held funds may sit in a separate interest-bearing trust account, which gets its own reconciliation. For the bigger picture, see our guide to law firm trust accounting and IOLTA.
• Property managers reconcile against owner balances, tenant security deposits, reserves and any prepaid rent held. The property software holds those ledgers, and the company's own books stay separate. Management fees move to operating once they're earned.
• Brokerages reconcile earnest money by transaction. Each deposit should tie to a contract and leave the account at closing or when it's released under your state's rules, so a balance that sits for months is worth a question.

Who's responsible

A bookkeeper can prepare the reconciliation, keep the ledgers and flag every difference. The attorney or broker stays responsible for trust compliance, including how often to reconcile, how a shortfall is handled and whether anything must be reported. We don't interpret bar or commission rules. Your state bar, your real estate commission and your own counsel are the source on those.

How we handle trust reconciliations

As part of our bookkeeping for attorneys, we reconcile the trust bank statement, the trust register and the client ledger total every month, list every reconciling item by date and amount, and flag any difference or negative balance for you to review. You get a report each month to sign and keep on file. We do the same for property managers and brokerages, working from their property or brokerage software.

If your trust reconciliations are months behind, our catch-up bookkeeping starts from the last month that balanced and works forward one month at a time. Anything we can't resolve goes on a list for you. Plans start at $299 a month; any setup or catch-up fee is quoted up front. It's part of our professional services bookkeeping, and you can see the full scope on our law firm bookkeeping page.

Common questions

How often should I do a three-way reconciliation?

Many state bars and real estate commissions expect it monthly, and some add other requirements, so check your state's rules. Monthly is a sensible minimum either way. The longer a difference sits, the harder it is to trace back to the entry that caused it.

What's the difference between a two-way and a three-way reconciliation?

A two-way reconciliation compares the bank statement with your register. A three-way reconciliation adds the total of every individual client or owner ledger. That third number proves the money is assigned to the right people, not just that the account total is right.

What should I do if a client ledger is negative?

Treat it as urgent. First check for a posting error, such as a disbursement recorded to the wrong client. If the negative balance is real, someone else's money covered the payment, and how to restore it and whether it must be reported depend on your state's rules. That's the attorney's or broker's call, with their own counsel.

Can QuickBooks do a three-way trust reconciliation?

QuickBooks Online's reconcile tool handles the bank-to-register match, which covers two of the three numbers. The individual ledgers usually live in practice or property software, such as Clio, MyCase, AppFolio or Buildium. We pull the ledger total from there and compare all three in one report each month.