Lucky Number 3? | Three way Trust Reconciliation

Hi there, Linda Artesani, Artesani Bookkeeping. Today we're going to talk all about the 3-way bank reconciliation. What the heck is it? How— why do I have to do it? And how do you make sure that it works out and it's easy to manage? So a 3-way bank reconciliation is just simply the bank balance. So you get your statement in the bank from the bank. That statement balance must match your bank account, your IOLTA trust account. We're talking trust accounting here. And also the total of all the trust accounts on the, on the, on the balance sheet. So the liabilities. So the liabilities must match the bank account. Because if you think of it in the respect of the IOLTA account is money that you don't own. And it's like having a bunch of little mini checkbooks and all the mini checkbooks have to add up to that total. That total has to equal what you have in the bank because it's not your money. You have to track it. It's really important to track it. So they use the 3-way reconciliation. It's one of the things the ABA is pretty strict about. You have to, depending on your jurisdiction or wherever your attorney is working or wherever the law firm is located, you have to follow the rules of the state. So every state is different. Some states require it monthly. Some states require quarterly. In my opinion, everybody should do it monthly because it's a lot easier to find a mistake monthly than it is to find one In a quarterly basis. If there's a mistake, it could be multiple mistakes, and it's just easy to stay on top of it. One of— probably one of the number one reasons you want to use a legal, legal app or legal, legal software on top of QuickBooks so that you can track this stuff. One of the primary reasons I like to use LeanLaw is because it makes sure that I don't give anybody back more money than they gave me. So that's important, right? You don't want the law firm taking a loss because they didn't track the money the right way. especially if you're doing it like on a spreadsheet and you can't give more money back than what's in the trust account. And that's one of the, one of the restrictions inside the platform is you can't give that money out. So let's start with how do you figure out if something's gone awry and how do you fix it? I'm gonna give you a couple of tips. I'm not gonna dive too deeply into actually fixing the software. This is my, this is my playground, so to speak, my demo file. So when we get into it, kind of go, ooh, that's bad data. That's because it is. It's a bunch of junk. And I let people in the file and let them play around in LeanLaw and let it be their sandbox. So sometimes there's a lot of things in mistake. And I could spend a lot of time in here trying to figure out exactly why these balances don't go. But I'll just show you a couple tricks on how to figure out why something— I'll give you a couple reasons why the bank account balance could be off, places you could really look and see if you can figure out exactly what is going on inside your books. Of course, you could always hire us, we'll help you fix it. One of the things we specialize in is helping people fix trust accounting. It's kind of a— I want to say it's one of those things that we just love doing. So it's kind of like a Rubik's Cube. It's a little addictive when you have to go back a ways to figure it out. But it's fun. And once you get it fixed and you start using LeanLaw and put the proper workflows in place, it should stay fixed all the time, which is the best part of it, right? Because you have to stay compliant. Biggest thing, biggest part of law firm accounting. Let's go into the file and I will show you a bad set of books and how we can— a couple of ways we can try to figure out what's going on and a couple of scenarios that could cause this issue. So, so here we are in my law firm test file. Yep. That's what it's named. So I'm going to take you right into the balance sheet. One of the best places to look for errors is in the balance sheet. You can see my trust account balance. This is my total bank balance, this $98,000, but my trust account balance is $69,338.50. This balance has to match. When I get down to my, my client funds held in trust, and I can just hit this button and collapse it so I can see the total, and it's $66,468. So you can see that I'm off by about almost $3,000 here. So it's $69,338.50 and I've got $66,468. So I'm off by about $2,800 or so. So I want to take you into LeanLaw so you can see in LeanLaw exactly where, where you can find this in LeanLaw. So typically you can pop into the screen and you hit the word billing. And that will expose this trust account tab. You click the trust account tab and this is going to expose all the trust accounts. And as you can see, the total here is $73,000. So I've got another issue because this number doesn't tie back to the number in my QuickBooks file. So there's another problem. When I come up here, I can see the balances here. The total liability balance is $73,652.03, and that's the total of the client balances. But my books say otherwise. My books say that there are only $66,468. So I have a problem with LeanLaw not communicating properly with QuickBooks, and the numbers don't match. Easiest way to go in here to find it is you can hit this— you can click on any of these balances to see where the balance lies. You can click Liability, you can click Total Trust, it'll open up this lovely file. It's going to show me all the transactions that equal that total. And as you can see here, this is equaling $88,000. So I have another problem in here. Let me just refresh because it's probably because I had the screen open. So this should be equaling what the total balance is that I just clicked out of, $73,000. Let's see, this should equal to $73,000. And nope, it's equaling $88,000. So there's a problem here where this balance is off as well. So we have to start really digging in to figure out exactly where these balances are coming. So it's picking up one of these balances here. So I can click on any of these. This should tie back to the number that's on LeanLaw. So there's obviously some kind of a communication here. $88,766.28, $89,000. So there's a difference here, the bank balance. If I come over here to the liability balance, I can open that up. Take a look in here to see what's going on. This is going to show me All the balances here, and as I get down here, I'm at that $73,000. So I've got $73,000 here. I've got a different balance in the other accounts. So what could be the problem? A lot of times it's just a problem of where a transaction was deposited to. So you might have done some work, received a retainer, the retainer went into undeposited funds, and instead of putting it in the trust account, it went into the operating. Best way to find that is just to reconcile the bank account. If you've got leftover transactions that aren't supposed to be in there, you're going to find them and look at them and say, oh, that's a retainer deposit that needs to go into the trust account. It's sitting in my operating. So that's the first place to go. Same thing when it comes to receiving payments. So as the law firm starts to bill out for their services, it creates an invoice. So you get some accounts receivable happening. In LeanLaw, you're going to receive that payment. And then you— it may go into undeposited funds. And again, the same thing, it might go into the IOLTA. So it never moved out when those funds should have moved from IOLTA to operating. That's just a couple of ways that you can kind of dig down. Definitely do the reconciliation first on both accounts, make sure there's nothing hanging, nothing that seems in the wrong place. That's the best place to go. And then from there, you're gonna just need to go through the transactions to see if maybe sometimes when the balance on LeanLaw doesn't match the balance in QuickBooks, when I click you saw that it was different. That means somebody might have made some manual entries inside of QuickBooks and didn't do all their client work through LeanLaw. You should always do all your client work through LeanLaw. So I hope that's helpful. I hope that maybe this short video kind of gives you some ideas. If you need any help with your trust accounting, please reach out. It's one of our specialties. One of the things we actually like doing, it's kind of fun trying to figure it out and figure out where the issue lies. And then once you get the good workflows in place with working through QuickBooks and LeanLaw, it shouldn't happen that you get things in the wrong place. I recommend if you have a bank that has an app where you can just deposit that check in each time you get one, instead of grouping them and putting them in undeposited funds, you can put the deposits in one at a time. Now, if that happens to be like a big job, a lot of firms like to put the deposits in at the end of the week. If you're that kind of type of firm, we've got a— in QuickBooks Online Advanced, there's actually a workflow tool That's called— it will remind you if you have things sitting in undeposited funds. And that's usually one of the places you really want to dig in and see, especially if your bank account balance is less than the balances that are listed on LeanLaw. You want to look and see, maybe those balances are not there because you didn't actually make the deposit to the bank. It's just sitting in that holding account, undeposited funds. So I hope that's helpful. Reach out if you need more help. Please join our Facebook group, QB Community Live, if you're a bookkeeper or an accountant. That needs help with law firm work or any kind of questions with QuickBooks, we'd love to help you. And on that note, I hope you all have a wonderful, wonderful day. Bye now. Bye.