This guide explains law firm trust accounting practices that keep client funds segregated, documented, and reconcilable every month. It focuses on the three records you must compare routinely and lays out a repeatable workflow that fits small law firms and solos without a full in-house accounting team.
What makes law firm trust accounting different
Trust funds are not the firm’s money. They are client property held in a fiduciary capacity. That difference drives how you record transactions, who approves disbursements, and how you close each month. Professional rules in many jurisdictions require lawyers to keep client funds separate and account for them precisely. ABA Model Rule 1.15 is a useful baseline, although state rules govern day-to-day practice.
Operating cash accounting centers on firm activity; trust accounting centers on client ownership. Every cent has a named owner and must be traceable from client intake through final disbursement. Each deposit, fee transfer, or payment must appear in the client ledger and align with what cleared the bank. A practical system pairs client detail with an internal control account that tracks the total liability to all clients.
Common trust arrangements include individual client trust accounts and pooled interest-bearing accounts. Keep written procedures stable, document timing and authorization decisions, and use a monthly three-way reconciliation as a backstop.
Law firm trust accounting: the three records behind a three-way reconciliation
A three-way reconciliation compares three independent records for the same period. When all three tie, you have corroboration that balances are complete and properly recorded.
- Client ledger balances: per-client running balances showing deposits, fee transfers, disbursements, and authorizations.
- Bank account balance: external confirmation of cleared trust cash.
- Firm trust-book balance: the trust-control liability account in the general ledger.
| Record | Typical owner | What it shows |
|---|---|---|
| Client ledger | Practice management system or trust clerk | Per-client deposits, transfers, disbursements, and balance |
| Bank statement | Bank | Cleared deposits and disbursements |
| Trust-control account | Firm accounting or bookkeeper | Aggregate trust liability |
When one record differs from another, label the cause and action. Deposits in transit and outstanding checks can be legitimate timing differences when documented consistently.
A monthly reconciliation sequence
- Collect client-ledger reports, bank statements, and trust-control account detail through the statement date.
- Confirm the ending bank balance and list deposits in transit and outstanding checks.
- Match cleared deposits and disbursements to client-ledger and trust-control entries.
- Compare all client-ledger balances with the trust-control account.
- Record approved adjustments with supporting documentation.
- Finalize and obtain preparer and independent-reviewer sign-off.
Monthly reconciliation package
- Bank statement and client-ledger detail
- Trust-control general ledger report
- Timing-item support, check images, and deposit confirmations
- Adjustment notes and approval evidence
- Follow-up list for aging items
Common warning signs and escalation steps
- Client-ledger totals do not equal the trust-control account without a documented timing explanation.
- Frequent manual plug entries or missing bank statements.
- Operating expenses paid from trust or transfers without support.
- Negative client balances or unresolved outstanding checks.
Assemble documentation, limit exposure where appropriate, re-perform the reconciliation with an independent reviewer, and obtain counsel or specialist support when the facts warrant it.
Separation of duties and access controls
Separate who can move money, record entries, and reconcile bank activity. Where staff size prevents full separation, add compensating controls such as dual approval thresholds, independent review of check images, role-based software access, and audit-trail review. For related control design, see this guide to internal controls in accounting.
Frequently asked questions
What is a three-way reconciliation in law firm trust accounting?
It compares client-ledger totals, the trust bank balance, and the general-ledger trust-control account for the same period. All three should agree after documented timing differences.
Can a firm use its operating-account process for trust funds?
No. Trust funds must be handled separately from operating funds to avoid commingling and related compliance risk.
Which trust-account rules apply?
Rules depend on jurisdiction. Start with your state bar, IOLTA or IOLA materials, and applicable ethics rules; ABA Model Rule 1.15 is a useful conceptual reference.
Actionable checklist for the next month
- Set a recurring reconciliation date and assign preparer and reviewer.
- Export client-ledger detail through the statement date.
- Retrieve the trust bank statement and identify timing items.
- Compare the client-ledger total to the trust-control account.
- Correct approved posting errors and retain evidence.
- Sign and file the reconciliation package.
Contact
If you want help establishing a monthly trust-account workflow or reviewing an existing process, contact Daniel Sandler, CPA.