Mastering Three-Way Bank Reconciliation for Bookkeepers in the Legal Industry
Jun 26, 2023As a bookkeeper working within the legal industry, you play a crucial role in maintaining the financial integrity of law firms. One of the most vital documents you should be familiar with is the three-way bank reconciliation. Surprisingly, many bookkeepers need to pay more attention to this reconciliation process, possibly due to a lack of understanding of the "three ways" and how this is not a “canned” report you click and produce. Even attorneys themselves may need to grasp the importance of this document thoroughly, despite it often being a requirement imposed by the local bar association.
What is a Three-Way Bank Reconciliation?
Three-way bank reconciliation involves three essential components:
1. Reconciled Bank Ending Balance
This figure represents the balance of your QuickBooks trust bank account after performing a reconciliation. It considers any outstanding transactions, such as uncleared checks or deposits, that must be diligently tracked.
2. Trust Liability Balance
Found on the balance sheet on QuickBooks Online, the trust liability balance is where all the collected client retainers are held. It represents the total amount of funds its clients entrusted to the law firm.
3. Legal Billing Software Balance
The third component relies on external legal billing software, such as Clio, which provides the trust ledger report. This report allows you to compare the individual client balances with the header account in QuickBooks online. Ensuring accurate tracking of client ledgers is critical, as discrepancies can cause imbalances within the trust account. This also can be an attorney's external spreadsheet if they have maintained the records that way.
If you have experience working with attorneys and law firms, you understand that the trust bank account carries a total balance representing all funds held in the trust. It is imperative to ascertain which client each penny belongs to as you want to avoid an imbalanced trust account, which will cause compliance complications for your client. Many bookkeepers think the bank is balanced to QBO, so their trust is balanced. That is not necessarily true if you don’t know the details of the trust ledgers for each client.
Contrary to the desire for automation, relying solely on software such as Clio or LeanLaw does not provide a seamless solution for generating reports. Instead, creating a three-way bank reconciliation report remains a manual process. For instance, if you are a LeanLaw user, exporting the trust listing report on the final day of each month is essential. Failure to do so may limit your ability to generate accurate, up-to-date reports, forcing you to perform the reconciliation on the day of export.
Streamlining the Process
At our firm, we have developed an efficient method to simplify the three-way bank reconciliation process for our clients. Using Google Sheets, we create a collaborative environment that facilitates tracking the trust balance and addressing any unclear transactions that may require attention. This approach ensures accuracy and enhances communication within the team.
As a bookkeeper working with attorneys, maintaining compliance in the trust account is crucial, and the 3-way bank reconciliation process is a powerful tool in achieving this goal. By regularly comparing your bank statement, client ledger, and attorney trust account ledger, you can ensure accuracy, comply with regulations, and build trust with your clients. Mastering this process will strengthen your professional reputation as a trustworthy and reliable bookkeeper that knows what it takes to do the bookkeeping for a law firm.
If you wish to deepen your understanding of the three-way bank reconciliation process, we invite you to join our mastermind group, "The Accountants Law Lab." By participating, you can amplify your practice to the next level!
Do you want to join our private group? We have a large collection of videos that you can learn from, and we hold weekly meetings every Friday at 9 am PT/12 pm ET.
We would love to have you join our group.
Stay connected with news and updates!
Join our mailing list to receive the latest blog post and updates on what is happening at the Accountant's Law Lab.
Don't worry. Your information will not be shared.
We hate SPAM. We will never sell your information, for any reason.
