What Is a Three-Way Reconciliation for Trust Accounts?
A three-way trust account reconciliation is the process of confirming that three separate records all show the same balance for client funds held in trust:
- The bank statement balance
- The book balance in your accounting records
- The total of all individual client trust ledgers
When all three balances match, you can be confident your trust accounting is accurate and compliant.
If your trust account is a pooled account such as an IOLTA, this reconciliation step is essential to perform on a regular basis. Each client has their own trust ledger, and the total of those ledgers (plus any ledger for bank fees) must equal the IOLTA’s adjusted bank balance and your book balance.
A three-way reconciliation report clearly displays these three numbers—the adjusted bank balance, the book balance, and the total of client trust ledgers—and shows they all match.
The example below illustrates what a compliant three-way reconciliation report looks like:
Two-Way vs. Three-Way Reconciliation
If you’ve ever balanced a checkbook, you already know how to perform a two-way reconciliation: you verify that the balance shown on your bank statement, when adjusted for uncleared deposits and withdrawals, matches the balance shown in your books or checkbook.
A three-way reconciliation takes that process one step further. In addition to comparing your bank and book balances, you also confirm that the total of all client trust ledgers equals those same figures.
This third check provides an additional safeguard. It verifies not only that your trust account is balanced overall, but also that each client’s funds are properly accounted for. Regular reconciliation protects client money and keeps your firm compliant with bar requirements.
The 3 Key Components of a Three-Way Reconciliation
To verify your trust account is fully balanced, you’ll need to confirm that these three figures match and keep precise trust accounting records.
The Adjusted Bank Balance
The adjusted bank balance is the amount shown on your trust account’s bank statement after accounting for any outstanding deposits or checks that haven’t cleared yet.
Adjusting the balance ensures your records reflect the most accurate, real-time amount of funds in the account.
The Book Balance (Trust Ledger)
Your book balance comes from the account ledger in your trust accounting system. It reflects all trust deposits, withdrawals, and adjustments that have been recorded internally by your firm.
This balance should match the adjusted bank balance once reconciliation is complete.
The Client Trust Ledger Balances
Each client whose funds are held in trust has their own individual trust ledger showing each deposit, withdrawal, and the current balance to prevent accidental client ledger overdrafts.
The total of all client ledgers, plus any ledger for bank fees, should equal both the adjusted bank balance and the book balance.
Why Three-Way Reconciliation Is Critical for Law Firms
Regular three-way reconciliations protect your firm from accounting errors, ethical violations, and compliance risks. They confirm that every client’s funds are properly recorded and safeguarded.
Accuracy
Three-way reconciliation ensures your records match across all sources, including bank statements, books, and client ledgers, so every dollar and transaction is accounted for exactly where it should be.
Accountability
By verifying each client’s balance individually, you create a clear audit trail that demonstrates transparency and responsible fund management.
Compliance
Regular reconciliations help your firm meet stringent state bar requirements regarding handling client funds and protect your firm from costly trust accounting violations or disciplinary actions.
Client Trust
Accurate, transparent recordkeeping builds client confidence. When clients know their funds are protected and properly tracked, they’re more likely to trust your firm with future matters.
Get a visual breakdown of the 7 essential trust accounting reports every law firm should review regularly to stay accurate and compliant.
How to Perform a Three-Way Reconciliation
There are two ways to perform a three-way reconciliation: manually or automatically. Below, we’ll walk through both so you can see how the process works by hand and how CosmoLex makes it easier.
Manual Three-Way Reconciliation
Performing a three-way reconciliation manually takes careful attention to detail. Here’s how to do it step by step:
- Reconcile your bank statement: Compare your trust account’s bank statement to your internal trust ledger. Adjust for uncleared deposits and outstanding checks to determine your adjusted bank balance.
- Confirm your book balance: Review your trust account ledger in your accounting system. Make sure every deposit, withdrawal, and adjustment is accurately recorded.
- Verify client trust ledgers: Add up all individual client trust ledgers—plus any bank fee ledger—and confirm that total matches both your adjusted bank balance and your book balance.
- Investigate discrepancies: If the three numbers don’t match exactly, review each ledger entry and bank transaction to identify missing, duplicated, or misclassified items.
- Prepare your reconciliation report: Document the adjusted bank balance, book balance, and total client ledger balance in a single report showing that all three match.
Manual reconciliation ensures compliance, but it’s time-consuming and prone to human error. Even a small data-entry mistake can lead to discrepancies, overdrafts, or compliance violations, especially when managing multiple client trust accounts.
The Easier Way: Automated Three-Way Reconciliation
With CosmoLex trust accounting software, the reconciliation process can be automated to ensure your data is accurate, secure, and available in real time.
CosmoLex includes both native-built legal accounting and trust accounting tools that complete the tedious background work for you:
- Automatically tracks every transaction across single or multiple trust accounts.
- Keeps trust funds completely separate from operating accounts.
- Imports electronic bank statements and auto-reconciles each month.
- Transfers funds automatically from trust to operating accounts when billing.
- Prevents common errors like overdrafts or comingling.
- Generates one-click three-way reconciliation reports that meet audit requirements.
Monthly trust reconciliations are mandatory, and they’re often the first thing an auditor checks. With CosmoLex, you can produce a compliant, audit-ready report in seconds instead of hours.
A three-way reconciliation is only one safeguard against trust accounting errors and audit issues.
Our quick-reference infographic highlights the 7 trust accounting reports that help law firms track balances, catch discrepancies early, and simplify every audit with clear, compliant records.
Download it to see which reports your auditor will look for first—and make sure your firm is ready.
Frequently Asked Questions About Three-Way Reconciliation
What is a three-way reconciliation?
A three-way trust account reconciliation is the process of verifying that three balances—the adjusted bank balance, the book balance (general ledger), and the sum of all individual client trust ledgers—all match. It’s a critical practice for law firms to maintain compliance while handling client trust funds.
Is a three-way reconciliation the same as a 3 way reconciliation?
Yes, both “three-way reconciliation” and “3 way reconciliation” refer to the same process. The term 3-way reconciliation is a common shorthand term used casually or when space is limited.
Why do law firms need to perform a three-way trust account reconciliation?
Law firms must perform these reconciliations regularly to comply with bar association rules, prevent the commingling of funds, and protect client money. Reconciling with a three-way check ensures that every dollar held in trust for a client is accurately accounted for.
How often should a three-way reconciliation be performed?
Most bar associations and professional rules require law firms to perform a three-way reconciliation at least once a month.
What happens if a trust account doesn’t reconcile?
If a trust account doesn’t reconcile, it indicates a discrepancy in the records. It is a serious issue that must be investigated and resolved immediately to maintain compliance and avoid potential disciplinary action.
