Three-Way Bank Reconciliation Gymnastics
Sep 29, 2025As a new legal bookkeeper, trust accounting can feel like performing intricate gymnastics—balancing multiple elements at once to avoid any missteps. In law firms, where client funds must be managed with absolute integrity, the three-way bank reconciliation is one of the most essential exercises.
This process goes beyond a standard bank reconciliation. It verifies that three sets of records align perfectly:
-
The adjusted bank statement balance
-
The trust ledger balance (your firm’s overall trust account record)
-
The total of all individual client ledger balances
By ensuring these three figures match, bookkeepers can confirm that client funds are protected, properly segregated, and compliant with state bar requirements.
Why Three-Way Reconciliation Matters
State bar regulations strictly prohibit mixing client money with earned fees. Even small discrepancies may signal errors, fraud, or unauthorized activity—issues that can result in penalties, loss of client trust, or even disbarment.
Performing three-way reconciliations regularly (usually monthly) provides:
-
Early detection of errors or unauthorized activity
-
Assurance of compliance with bar rules
-
Accurate reporting for clients who may request balances at any time
Think of it as financial gymnastics: the goal is perfect balance, requiring agility in tracking transactions, spotting variances, and making corrections.
Breaking Down the Three Components
A successful reconciliation ensures the following three records match exactly:
-
Adjusted Bank Statement Balance
-
Start with your bank’s ending balance.
-
Add deposits in transit (recorded but not cleared yet).
-
Subtract outstanding checks/withdrawals.
-
Remember: bank fees must never come from the trust account—they belong in the firm’s operating account.
-
-
Trust Ledger Balance
-
Your firm’s internal “master” record of all trust transactions (like a checkbook register).
-
Should reflect every deposit, disbursement, and interest entry.
-
-
Total of Individual Client Ledgers
-
Each client has their own ledger tracking their specific funds.
-
The grand total of all client balances must equal the trust ledger and adjusted bank balance exactly.
-
No client ledger should ever show a negative balance.
-
If these numbers don’t align, investigate: uncleared transactions, recording mistakes, or possible unauthorized activity.
The Step-by-Step Process
Performing a reconciliation monthly (with your bank statement) is best practice. Here’s how:
-
Gather Documents – Bank statement, trust ledger, and client ledgers. Ensure all are current.
-
Reconcile the Bank Statement – Adjust for deposits in transit and outstanding checks. Correct any bank errors by reimbursing from the operating account.
-
Calculate the Trust Ledger Balance – Tally all transactions and confirm the book balance.
-
Sum Client Ledgers – Add all client balances. Ensure no negatives.
-
Compare the Three Figures – All must match. If not, trace discrepancies until balanced.
-
Document & Report – Prepare a reconciliation report with all three balances and supporting detail. Retain for audits.
Setting Up in Google Sheets
Specialized tools like LiveFlow automate this process, but Google Sheets is a flexible option for solo practitioners or small firms. Here’s how to set up a basic template:
Step 1: Create a Workbook
Name it “Trust Account Reconciliation [Month/Year]” with tabs for:
-
Bank Statement
-
Trust Ledger
-
Client Ledgers
-
Adjustments
-
Reconciliation Summary
Step 2: Structure Each Tab
-
Bank Statement: Columns for Date, Description, Deposits, Withdrawals, Balance.
-
Trust Ledger: Mirror bank statement format but track firm entries. Use formulas for running balances.
-
Client Ledgers: Columns for Client Name, Date, Description, Deposit, Withdrawal, Balance. Use filters, SUMIF, or pivot tables for totals.
-
Adjustments: Log discrepancies, their type, and resolution.
-
Reconciliation Summary: Link totals from each sheet. Use formulas to calculate variance (should be zero). Highlight discrepancies with conditional formatting.
Step 3: Use Google Sheets Features
-
Formulas: SUM, SUMIF, VLOOKUP for cross-checking.
-
Conditional Formatting: Flag negative balances.
-
Collaboration Tools: Protect sheets and share with your team securely.
-
Audit Trail: Use version history to maintain transparency.
Step 4: Perform and Save
-
Enter data monthly.
-
Reconcile and adjust until the variance is zero.
-
Save/export as PDF for records.
Pro Tips and Common Pitfalls
Tips:
-
Reconcile promptly after bank statements arrive.
-
Train regularly on state bar trust accounting rules.
-
Use spreadsheets for learning, but consider automation as your firm grows.
Common Mistakes:
-
Forgetting pending items.
-
Allowing negative client balances.
-
Deducting bank fees from trust accounts.
-
Failing to document adjustments.
Final Thoughts
Three-way reconciliation may feel like gymnastics at first, but with practice, it becomes second nature. Mastering this process not only ensures compliance but also strengthens your firm’s reputation for integrity and precision.
If you find persistent discrepancies, seek support from an experienced bookkeeper, auditor, or join a professional learning community like the Law Lab.
With the right process—and maybe a little help from Google Sheets—you’ll turn reconciliation gymnastics into a graceful routine.
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.
