Each month, for each trust bank account operated by your firm, you must compare your trust accounting records for the month with the trust account statement from your savings institution for that same month and figure out whether your records match the savings institution’s statement [Rule 5-43(2)]. If the records do not match, you need to figure out why.
Think of a reconciliation as the systematic comparison of the transactions in the book of original entry and the total of the balances in the client trust ledgers with transactions on the bank statement for the trust account. The report explains the reasons for any differences among the three balances by recording ‘reconciling items’ to show that the balances are the same as the bank statement balance when the reconciling items are included.
You must balance exactly, to the penny.
Doing this each month is one way you might discover errors and omissions, outstanding cheques or missing deposits, and anomalies in the account such as improper withdrawals. Not only does this comply with the rules, it is easier to find and fix an error if you only have one month’s worth of records and supporting documents to check.
You have until the end of the next month to figure all that out [Rule 5-43(2)], and once you do, you must keep a permanent copy of the trust reconciliation report for that month with all the supporting documents.
Even if there has been no activity in the account or the balance is zero, you must do a monthly trust reconciliation for every trust account of the law firm.
More detailed explanation of a Monthly Trust Reconciliation
A trust reconciliation is sometimes called ‘a three-way reconciliation’, because the three main records are compared to each other every month. This means that:
a) the trust account bank statement,
b) the book of original entry, and
c) the total balance of all the client trust ledgers
must be reviewed to ensure that all three have the same balances, and if not, that the reconciling items are identified.
Trust Bank Account Balance = Book of Original Entry = Total of Client Trust Ledgers
Because the book of original entry tracks every transaction in the pooled trust account, it seems logical to think the statement from your savings institution showing the balance in the trust account would always be the same balance as the book of original entry at any given time. However, there are many reasons for the balances to be different.
Consider a cheque for $4,000 that is written on October 20th on the pooled trust account, but is not cashed before the end of the October.
Your book of original entry must show the $4,000 cheque as a withdrawal right away on October 20th, but the statement from your savings institution for October will not show the withdrawal of $4,000 since the $4,000 cheque was not cashed yet.
In that situation, the October 31st balance for both your book of original entry and your savings institution’s statement will not be the same.
Your reconciliation report will record the full details (issue date, cheque #, payee, dollar amount) of the outstanding cheque to be cashed to explain why the book of original entry balance and the statement balance are different.
The basic steps for completing a monthly trust reconciliation are explained in the following example:
Early in June you either get a copy of the May statement from your savings institution by mail or on June 1st you go online with your “read only” online access and obtain the May statement for your trust bank accounts.
Record the statement’s month end balance for May on the report you are creating for your reconciliation (such as a Trust Account Bank Reconciliation Report) as your next step in the reconciliation.
You list and then total all the individual client trust ledger balances and record that total on your report, and then you record the May 31st balance from your books of original entry on your report as well.
You compare the three balances. The three balances do not match exactly.
You must review your records and supporting documents to discover why the balances do not match exactly.
You also review your monthly trust reconciliation report for April to see if there are any reconciling items that remain outstanding at the end of May.
You must complete the investigation and review and explain each difference by entering “reconciling item(s)” into your Trust Account Bank Reconciliation Report so that the balance for your trust records matches exactly the balance in the bank statement once the reconciling items are included.
All of that must be completed no later than June 30th.
Full details of every reconciling item must be listed separately on the monthly trust reconciliation.