2. Completing a Pooled Trust Account Monthly Reconciliation
Here are the steps to follow:
STEP 1: Monthly statement. When you get your monthly trust account statement from the savings institution, immediately review it. All transactions should look reasonable – there should be no surprises! However, if you see a charge or fee that should not be there, make a note of it. It not only will be a reconciling item, but it will require action to investigate and correct.
You also need to account for all enclosures with your statement, since occasionally a cheque clears the bank but the original cheque / cheque image is not included with your statement. Make note of it. You will need to contact your savings institution to ensure you receive the missing record.
STEP 2: Supporting documents. Gather your book(s) of original entry and your client trust ledgers, or the equivalent electronic reports from your accounting system. You will also need the reconciliation from the prior month, so ensure you have that on hand too.
You are going to compare all the entries on monthly statement with the entries in your book(s) of original entry. Remember that the deposit and withdrawal dates on the savings institution records will be the date that the deposit or withdrawal cleared so the dates are unlikely to match the dates you will have recorded as the date you deposited the money or the date you wrote the trust cheque.
STEP 3: Create the reconciliation(s). Using the above records, you will be preparing a report that lists all reconciling items to show that the balances of the book(s) of original entry, the client trust ledgers and the ending balance of your monthly statement are identical when the reconciling items are included.
Some firms prefer to separately compare only the book of original entry and the monthly statement, with the end result usually called a bank reconciliation. This bank reconciliation would then be a component of another report commonly called a cover sheet or three-way reconciliation, where the bank reconciliation balance is compared with the client trust ledgers and the book of original entry. As long as the three balances are compared and reconciled, it does not matter if the bank reconciliation is separately prepared or not.
STEP 4: Systematic comparison. You will now need to systematically compare the transactions in your book of original entry with your monthly statement.
Are there any transactions on your statement that are not in your book of original entry? Perhaps there is a bank fee that was erroneously charged to your trust account. This is a reconciling item and an action item that requires investigation and correction.
How about transactions in your book of original entry that are not on your monthly statement? These are always reconciling items, but only sometimes require investigation and correction. For example, a cheque that was written at the end of the current month that was not yet cashed by the recipient is an outstanding cheque that usually requires no investigation or correction. If a deposit was recorded in the book of original entry on the last day of the month and your deposit records show that it was deposited on the first day of the subsequent month, no further investigation is needed.
STEP 5: Entry errors? If you still don’t balance after you’ve completed your systematic comparison, start looking for entry errors.
Transposed numbers are a common error and might appear in your records or in the bank records. For example, assume the cheque you wrote and recorded in your book of original entry was for $197, but the savings institution recorded it as $179 in their records. The $18 difference is a reconciling item and you must contact your savings institution to resolve the error.
Errors in entering the number are also common errors. For example, assume your client provided a cheque for $100, but you recorded the receipt as $1000 in error in the law firm accounting records. The $900 difference must be recorded as a reconciling item for the month in question, and correcting entries are required.
In manual accounting systems, sometimes the book(s) of original entry balance does not match the total client trust ledger balances. If that is the case, a common error is that the amount recorded in the book(s) of original entry does not match the amount that should have also been recorded in the one relevant client trust ledger. You will have to compare all entries to find the error(s), and any errors found are reconciling items that require correcting entries.
STEP 6: Complete the reconciliation review checklist. There is more than merely completing the reconciliation itself that should be done monthly. For example, the client trust listing should be reviewed to ensure there are no overdrawn matters, and that inactive matters are being addressed on a timely basis. It is also a good time to review the records to ensure that appropriate receipts were issued for any cash received. These are the types of items listed on the Law Society’s Reconciliation Review Checklist, available on the Law Society website. It is recommended that all firms complete this checklist monthly.
STEP 7: Save and store. Save the newly created report and checklist with all supporting documents in your records, and ensure that you finish the report by the deadline (the end of the month following the month you are reconciling).
For firms with more than one trust account:
- Should you have more than one pooled trust account, each account must be reconciled separately.
- You must do a monthly trust reconciliation for any specific trust investment accounts.
- You must do a monthly trust reconciliation for any restricted trust accounts.
You can find a bookkeeping illustration of a monthly trust reconciliation of a pooled trust account here.
Remember that Rule 5-43(2) requires that the monthly reconciliation must be completed “no later than the end of the following month ”, so for example, the reconciliation report for the month of October must be completed on or before November 30th.