What is three-way trust reconciliation?

Three-way trust reconciliation verifies that three numbers match: the bank statement balance, the general ledger trust liability balance, and the sum of all individual client ledger balances. When aligned, client funds are properly tracked. Divergence indicates errors requiring immediate investigation. Professional regulations typically require monthly reconciliation.

Where reconciliation breaks down

Payment received but not posted to the client ledger. Disbursement recorded in GL but not in the client ledger. Bank fees not allocated. Transfer between matters not updated in both ledgers. Each error type creates a specific mismatch pattern that helps identify the source of the problem.

Regulatory consequences

Trust violations rank among the most serious professional misconduct. Commingling client and operating funds brings sanctions. Negative client balances suggest misappropriation. Failed reconciliations demonstrate inadequate supervision. Three-way reconciliation is fundamental to compliance.