Part 4 of a discussion on lawyers Three Step Trust Reconciliation.
Step 3: Trust Ledger Balance Analysis
In Part 2 we saw that Step One requires a high level overview of the trust position. Part 3 describes how to confirm the Trust Cash part of trust position by verifying that the Cash Book to Bank balances match.
Verification
While Step One requires a very high level test to confirm that the trust assets and liabilities correspond, the next steps require internal verification. We must verify the internal consistency of the reports we rely on.
Trust Ledger Balance Analysis
Now we investigate the client trust ledgers. By definition of the trust, all trust transactions must be allocated to specific ledger accounts, no ledger account may have a debit balance and all ledger accounts must have credit balances.
Client Trust Ledger Balances
Each client should have a separate account in the system. DynamicLTA maintains every single matter as a separate ledger. All trust transactions should be posted to its relevant ledger.
As discussed above, the integrated double entry system, allows for easy processing of transactions. The List of Client Balances and Trial Balance will indicate the ledger balance on the selected date.
On commercial accounting systems the Trial Balance will only reflect the business accounts. It is recommended that a List of Client Balances be drawn in addition to the Trial Balance to verify the trust ledger balances. Note that the DynamicLTA Trial Balance includes both the trust and business balances.
A ledger exists for each account. Each ledger contains the details of each transaction, allowing an accurate and complete drill down of each account as it is reflected on the high level reports, right down to the ledger and individual transactions.
Balancing the Trust
Transactions may occur on a client’s business account, which may allow the transfer of client funds from trust to business, such as paying for the professional fees incurred, or direct payment from trust, on behalf of or on instruction of a client.
DynamicLTA has a built in trust-and-business balancing transaction option. This will balance out the trust by generating ledger entries reflecting the amounts affected on each ledger. This is normally referred to as a trust to business transfer.
Regularly balancing the trust will force ledger entries which will balance each individual client trust ledger account, eliminating deficits on individual accounts and transferring surplus amounts to business.
The Trust Balance entry will ensure the integrity of the trust.
Note that this is only a ledger entry. This means that after using this function each individual client trust ledger should have a nil or credit balance. It remains for the lawyer to transfer the money between the trust and business bank accounts.
DynamicLTA allows multiple, repetitive transfers, meaning that such transfers can be done at any time during the month, week or day. Each such transfer will be accurate up to that point in time.
Deficits, or a surplus will appear by comparing the total trust ledger to the cash books. See Step 1: Trust Assets and Liabilities above. Also note that DynamicLTA does not link to any electronic banking facilities. A paper based cheque or electronic fund transfer must still be made between the firm’s banking accounts.
Step Three
Analyzing the client trust ledger will require at least two documents:
- List of Balances or Trial Balance
- Ledger
Client Trust Ledger Balances must not hide a deficit on certain accounts, by allowing a surplus on other accounts.
It is recommended that both the Trial Balance and the List of Client Trust Ledger Balances be used as confirmation of the accuracy of the balances. The risk exists that a deficit on one account may be hidden by a surplus on another account. By inspecting the reports for trust debit balances, such problematic accounts can be identified.
DynamicLTA supports a special six column ledger analysis report designed specifically to make understanding of the business-trust ledger easier.
| Ledger History Analysis of a single ledger |
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| A screenshot of a six column Ledger History Analysis. Trust and Business clearly distinct with running balances. |
| Step 1 | Trust Ledger = Trust Cash |
| Step 2 | Trust Cash = Trust Bank +/- Recon |
| Step 3 | Client Trust Ledger Balances |
Verification of the Client Trust Ledger Balances in Step Three, ensures that the remaining part of our trust position has been confirmed.
In Conclusion
In the discussion above, we have illustrated how the integrity of the lawyer’s trust account can be confirmed.
Think of the Three Step Trust Reconciliation process as a pyramid. At the top of the pyramid we take a very high level view of the trust, by simply confirming that the liabilities equal the assets. The next step is to verify that the assets (cash) are accurately reflected, and the last step is to verify that the liabilities (ledgers) are accurate.
DynamicLTA makes it easy to distinguish trust from business, maintain separate ledger accounts, and confirm the accuracy of both the high level trust and business ledger balances and cash books, and drill down to an individual cash book, ledger or to an individual transaction.
Sophisticated lawyers trust account software. Exactly what your trust needs.
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–Dynamic