Linda Artesani walks legal bookkeepers through three-way bank reconciliation: matching the QuickBooks bank balance, the trust liability balance, and client ledgers from Clio or LeanLaw. She recommends doing it monthly, using a side-by-side spreadsheet to spot uncleared checks and missing deposits that throw accounts out of balance.
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Hi there, Linda Artesani from the Accountants Law Lab. This week we're gonna discuss mastering the three-way bank reconciliation. And so as a bookkeeper working within the legal industry, you really play a crucial role in maintaining the financial integrity of the law firm. And one of the most important documents you should be familiar with is the three-way bank reconciliation. The 3-way bank reconciliation involves 3 essential components. And I remember the first time I heard this term, I thought, what the heck is a 3-way bank reconciliation? So that first component is the reconciled bank ending balance. So you're gonna do that action right inside of QuickBooks. You're going to reconcile the bank. Clear all the transactions. I'm talking about the trust bank account and perform the reconciliation. Now, when you're done doing that, you're gonna have to take into account— they're gonna be transactions, what I call transactions in transit. So you're thinking, looking at any checks that didn't clear for the month and any deposits that may or may not have cleared that trust bank account. These are important because that's your adjusted bank balance. The number at the end of the day should be the bank account balance plus or minus those adjusted entries. The second component is the trust liability balance. So the balance— that balance is found on your balance sheet in QuickBooks Online, and it represents the total of the funds that you've entrusted— the clients have entrusted to the law firm. It's where all those collected retainers are held. Remember, When a retainer comes in, it's gonna come in as a bank deposit. There's your debit. You're debiting that asset, the bank account, and you're crediting that trust liability account. And you're booking it down into a sub-liability account. But when you roll up all those subs into that parent, it's that parent number. The bank account and the parent number should equal. It should not be different. And this is where we find a lot of times we see that A client can think their books are balanced, and they're reconciled 3 ways. But in actuality they're not, because those 2 numbers don't align. That's probably the most, most often seen section that doesn't equal. So when you expand out that trust account, you need to know every penny that's in that total on the header. It's really important. Now the third piece is that external billing software, or that place that the client is running their billing through. And that they're balancing and tracking their trust. So in Clio, you pull a trust ledger report and you filter it out, you take out all those zero balances and you put the open, I always like to put include the opening and the closing balance. So I'm seeing that little mini ledger right there in my, right in my eyes by the month that I'm reconciling. Okay. So it's going to allow you to have accurate tracking of the client trust ledgers by using this legal billing software. You can do the same in LeanLaw. And the beauty of LeanLaw is that it, it pushes it into the subledgers. So I've got that accordion-like view of my trust account balances. In Clio, I have to take that extra step to move it, but it's very much worth your time to move it. So if you have experience working with attorneys and law firms, you understand that that trust account balance in that bank account is the balance that represents all the funds that the law firm is holding. And it's imperative to ascertain which client each penny belongs to. The failure to do this and having imbalanced trust bank accounts can have severe compliance complications for the attorney. So it's important that we track it to the penny, and I mean to the penny. That's why at the end of the year it's important to And actually, throughout the year, you want to really look at what you have in the uncleared account, things that are aged out. You want to go to the attorney and say, I need to— you need to look at these, reach out to the client, and then eventually it ends up in unclaimed money if they can't find the client, or the client just doesn't cash the checks. If the deposit's missing, then we need to figure out why it was put in the books and it never made it to the bank. And that happens a lot with law firm accounting. Where the client will actually do the work of putting the information in and recording the invoice, recording the payment, but they don't actually move the money. So that's another scenario that you're going to see. And that's why it requires very, a very good eye and a person that's got a lot of attention to detail to follow this. And to streamline these processes, some firms, they've adopted methods like using Google Sheets to create a collaborative environment to show this 3-way bank reconciliation. It's kind of what we are doing We are trying to find ways to represent this to the— our attorney clients, and we have not found a software that will be able to pull in this 3 ways because your legal billing software is here, Clio, LeanLaw, and your accounting software is here. It's QuickBooks, which the bank account is in. So they're not embedded as one. It's not an all-in-one like a Zolo or a Cosmolex. So you have to create this externally. And this is the best way we found is to do a Google Sheet to, to create this form that shows the bank balance, the Clio balance, the QuickBooks subledger balance. Those 3 figures should align, and if there's differences, like a check is in transit, you create that extra column to show that as well. And then you're able to have this manual process, but it's an important manual process, and you'll find that using a Google Sheet or an Excel spreadsheet is a powerful tool to maintain compliance, and maintaining compliance of that trust account is critical, and that 3-way bank reconciliation process is a powerful tool in achieving that goal of giving the compliance piece to your attorney. Should happen monthly, even if their bar requirements are quarterly. It should be done monthly. And really, you can't let that bank statement go without being reconciled. It can't go on for months. You really need to make sure that the client ledgers align and that the trust account ledger is, is to the penny. And that's the only way you're gonna be able to ensure accuracy and comply with the regulations. And really, for us, it's building trust with our clients. They know they don't have to worry about that. I can't tell you how many times we've had clients come to us, and they, they are not sleeping at night because this is something that's weighing on them because they know their trust isn't in balance, and they're a lot of times sitting with money in trust and they're afraid to move it over 'cause they're not sure of the amount. And that's where we can come in and be the hero to our clients. That's what kind of makes, makes working with lawyers a lot of fun. So mastering the process, these processes, and this process in particular will strengthen your professional reputation as a trustworthy and reliable legal bookkeeper, one who knows how to handle bookkeeping for a law firm. If you wish to deepen your understanding of the 3-way bank reconciliation process, consider joining us at the Accountants Law Lab. We have a Facebook group and we also have a paid mastermind group where we really deep dive into these topics and more. And I know that if you join us, you'll find that we provide valuable insights that will help you amplify your practice to the next level. I hope you join us. And until that note, I hope you hit subscribe as well, so you don't miss any videos, and we'll see you all next week. Bye now.
