3.  Reconciling Items

Once you have completed the monthly trust reconciliation comparison of your trust accounting records with your savings institution’s monthly statement, you may have no reconciling items, or a variety of different types of them.

These are some basic guidelines for identifying items that may need reconciling and how to address with those reconciling items which require follow up.

REMEMBER:

Reconciling items that require action on your part need to be listed on the reconciliation in full detail and action must be taken in a timely fashion to investigate and/or correct the difference.

3.  Reconciling Items

a)  Outstanding Cheques

Outstanding cheques occur when you have recorded the cheque in your book of original entry but the recipient has not cashed it yet, so it is not on your savings institution’s monthly statement.

Outstanding cheques can often resolve themselves without any additional work on your part. However, you should always review them each month to see if any are unusual, such as:

  • Cheques for large dollar amounts that are still outstanding at the end of a month can be unusual, as large cheques are generally cashed quickly. If they are still outstanding, a bit of further investigation may be needed to ensure the intended recipient actually received the cheque;
  • Cheques that have been issued three or more months ago and still remain outstanding should be investigated to try to ensure they are cashed before they become stale-dated;
  • Cheques that are more than six months old are considered to be stale-dated. Although the return policy of savings institutions vary, some may refuse payment on the cheques once they are six months old. The original cheque would then need to be cancelled and a new cheque issued, recording all the associated trust accounting entries for each transaction. Depending upon the dollar amount and risk associated with the first one, you will also need to consider placing a stop payment on the original cheque if it cannot be located.

b)  Outstanding Deposits

Outstanding deposits usually require no action on your part. This is true if they result from a receipt being recorded in your book of original entry at the end of the month but the corresponding deposit was not made to your savings institution until the beginning of the next month. Assuming the deposit was already brought in on the first or second banking day of the month, the deposit will have resolved itself.

However, if you have a reconciliation that shows an outstanding deposit that does not meet the above criteria, you must investigate and resolve it (i.e. why is the money not in the trust bank account?)

c)  Correcting Errors

Other reconciling items always require action. Some examples include:

  •  The cheque you wrote and recorded was for $197, but the savings institution incorrectly recorded it as $179 in their records. The $28 difference is a reconciling item and you will need to contact your savings institution to resolve the error.
  • You ran out of trust cheque stock recently and ordered more. Your savings institution erroneously charged the fee for cheque printing to the trust bank account instead of your general bank account. This $35 fee is a reconciling item for which you also should contact your savings institution to resolve.
  • Your client provided a cheque for $100, but you recorded the receipt as $101 in error in the law firm accounting records. The $1 difference must be recorded as a reconciling item for the month in question. Correcting entries must be recorded in the book of original entry and the applicable client trust ledger to reverse the original entry that was for the wrong amount, and re-record an entry in the correct amount. The specifics of how you correct it will depend on your accounting system. However, all corrections should be recorded in your system using the current date – the date you are making the correction. Some members think the adjustment should use the same date as the original entry. This is called backdating and must not be used. Make sure your description for each correcting entry explains what happened so that there is full information.
  •  If you are using a manual accounting system, sometimes the reconciling item is not related to the trust bank account at all, but is a recording error on your part. For example, sometimes the amount recorded in the book of original entry doesn’t match the amount recorded in the client trust ledger. This too is a reconciling item to be shown on your reconciliation, and corrected in whichever of the two records had the error. Remember – no backdating!

REMEMBER:

The dollar value of the reconciling difference or reconciling item is irrelevant.  The trust account, by its very nature, must be reconciled to the penny, with each and every adjustment identified in full detail and corrected on a timely basis.