Trust accounting is the full system a law practice uses to safeguard and track money or property held for clients and third parties. IOLTA reconciliation is one control within that system: it checks that the adjusted bank balance, the trust-account control balance, and the combined client-ledger balances agree. IOLTA is a jurisdictional program for handling interest on eligible client funds—not another name for a firm’s entire trust-accounting system.
What each term means
Trust accounting
Trust accounting covers the records and safeguards used to keep client or third-party property separate from a law firm’s own money. It includes recording receipts and disbursements, identifying whose funds are held, maintaining a separate ledger for each client or beneficiary, retaining supporting records, and accounting for money received and distributed. The ABA Model Rule 1.15 preface describes the lawyer’s fiduciary duty to safeguard trust property, segregate it, preserve complete records, and promptly account for it.
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IOLTA
IOLTA means Interest on Lawyers’ Trust Accounts. ABA materials describe IOLTA programs as established by jurisdictional law or court order. They govern qualifying trust-account arrangements and how interest is handled; participation and local requirements vary. See the ABA IOLTA resources and its IOLTA status information.
Reconciliation
Reconciliation is a check that records and bank activity account for the same money. A three-way reconciliation compares the adjusted bank balance, the trust-account journal or control balance, and the total of the individual client-ledger balances. Differences must be explained and documented; the process is intended to expose errors or unexplained activity, not to make a mismatch acceptable.
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What three-way reconciliation compares
| Balance | What it represents |
|---|---|
| Adjusted bank balance | The statement balance adjusted for legitimate timing differences, such as outstanding checks and deposits in transit. |
| Trust-account control balance | The account-wide balance derived from the trust records: the prior balance plus receipts minus disbursements, with appropriate timing adjustments. |
| Total client-ledger balance | The sum of the remaining balances for every client or beneficiary whose funds are held in the account. |
After appropriate adjustments, all three figures should agree. ABA guidance describes the control-balance calculation and timing adjustments in the comment to Model Rule 1.15. Its IOLTA compliance resources address reconciliation and supporting records.
How to perform the check
- Collect the period’s records. Obtain the bank statement and the corresponding trust journals or accounting-system reports.
- Reconcile bank activity. Match deposits and disbursements against the trust records, identifying legitimate timing differences such as outstanding checks and deposits not yet credited.
- Calculate the control balance. Start with the prior balance, add receipts, and subtract disbursements; account for timing items when comparing the result with the bank statement.
- Generate client-ledger balances. Include each client or beneficiary with funds still held in trust.
- Compare and retain. Add the client-ledger balances and compare their total with both the adjusted control balance and adjusted bank balance. Keep the reconciliation and its supporting reports.
- Investigate differences promptly. Identify and document the cause rather than carrying an unexplained discrepancy forward. ABA-published material describes errors such as deposits not assigned to the correct client and trust funds used for operating expenses.
For the underlying records used in this process, see the ABA model recordkeeping rule and the ABA Ten Principles of Trust Accounting.
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How often should a lawyer reconcile?
ABA model commentary treats quarterly reconciliation as a minimum in its model framework and says monthly reconciliation is preferable because errors become harder to locate over longer periods. ABA practice guidance also recommends monthly reconciliation. These are model and practice materials, not a substitute for the rules adopted in the jurisdiction governing the account. Consult the controlling local requirements for frequency and any required forms or procedures.
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Which records belong in a trust-accounting system?
The ABA model recordkeeping rule lists records that include:
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- Receipt and disbursement journals and individual client ledgers.
- Client accountings, bills, and supporting documents.
- Bank statements, deposit records, and check records.
- Documentation for electronic transfers.
- Trial balances and reconciliations.
- Relevant portions of client files.
The model rule proposes retaining records for five years after representation ends, but that period is not automatically binding everywhere. Check the actual jurisdiction’s rule for applicable record types and retention periods.
Who is responsible when software or an outside professional helps?
Accounting software can organize ledgers and reports, and a qualified legal bookkeeper or accountant may help establish or review a workflow. Neither replaces the lawyer’s responsibility to safeguard client funds and supervise the work. ABA-published guidance on trust-accounting software and online payment services for law firms discusses tools and services; vendor feature claims should be checked independently.
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Which rules control?
The ABA Model Rules and practice resources offer a framework, but the governing jurisdiction’s adopted rules control. Requirements can differ for reconciliation timing, required forms, banking arrangements, and record retention. Confirm the rules and IOLTA program requirements applicable to the firm and account rather than treating ABA model guidance as a universal mandate.
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