Updated August 2012
- What is a bank reconciliation?
- What causes differences between my records and that of my financial institution?
- Why do I need to reconcile bank accounts?
- What documents to I need to prepare the reconciliation?
- How do I perform the reconciliation?
- What are some tips that may be useful to me for preparing or reviewing trust reconciliations?
- Statutes and Rules
1What is a bank reconciliation?
A bank reconciliation is a process undertaken to ensure that your records and the records of your financial institution are in agreement. The information contained in a reconciliation also enables you to determine whether there were any errors made receiving or disbursing funds or posting transactions to your accounting records.
The balance of your bank account as reflected in your accounting records (journals and sub-ledgers) can differ from the balance according to your bank statement for many reasons. For example, your bank may have failed to record a transaction correctly, or a cheque that you issued might not have cleared your bank account (other items that may cause a difference are addressed in the next section).
Specifically, a bank reconciliation is the action of
- comparing the balance of your bank account, according to your bank statement, with the balance of the account according to your accounting records
- identifying the causes of any difference in the bank balance according to your records and those of the financial institution
- correcting any errors made by you or the bank in recording transactions
The results of this activity are recorded in a formal statement also called a bank reconciliation (See the sample trust reconciliation in the Resources section of this How-To Brief).
2What causes differences between my records and that of my financial institution?
Bank processing errors
A bank processing error occurs when your financial institutionrecords a transaction different from what is reflected in your sourcedocuments and financial records. Some common processing errors include:
- a cheque/payment issued from your account clears your bank statement for an amount that is greater or less than the amount written on the actual cheque/payment request
- a different total amount of a deposit is credited to your bank account than the amount that appears on your deposit slip and/or journal
- payments from or deposits to the account that were made in error—this could include a deposit directed to the wrong account or a cheque cleared from the wrong account by the financial institution.*
*Depending on the nature of your practice, you mayreceive funds from clients (or from third parties on behalf of clients)via wire transfer, electronic/Internet transfer or direct deposit toyour account. Since you are not making the deposit, you will not haveany original record to record that the deposit was made. These amountsmay just "appear" on your bank statement. Therefore, it is importantthat you make arrangements with all parties to notify you in advance ofany deposits they will be making to your account. Ask them to send youconfirmation that the deposit or transfer was made to your account.
Service charges and fees
Financial institutions often impose service charges for items such as cheque certification or “non- sufficient funds” (NSF) cheques. You may not be made aware of these charges until after they appear in your statement from the financial institution.
If the services charges allocated to a mixed trust account are taken directly from the trust account, you must make arrangements to repay the charges as soon as they are identified. Make sure that the agreement you sign when opening a mixed trust account directs the institution to deduct any service charges for your trust account from your general operating account and does not allow the financial institution to remove any money from your trust account on its own.
NOTE: If you deposit a cheque to your trust account and it is returned NSF, your financial institution will deduct the amount for the charge as well as the full amount of the cheque.
A timing difference is the result of a cheque/payment issued from your account, or a deposit made by you to your account, that is not processed by the financial institution until a later date.
For example, when you issue a cheque for $500 from a bank account, you would record the amount of that cheque as a disbursement in your accounting records. According to your records, your bank balance is now $500 less. However, it may be several days, weeks or even months before the cheque is cashed by the party to whom it was issued. Until that cheque is cashed, your accounting records, which reflect the $500 payment as being made, will indicate an account balance that is less than the actual balance of your account. This is also referred to as an outstanding cheque.
Similarly, if you make a deposit to your bank account late in the day, on a weekend or on a holiday, it is likely that the bank's records may not reflect that the deposit is made until the next business day. Your records would indicate a bank balance that is greater than the actual balance in your bank account until the receipt is recorded by your financial institution. This is also referred to as an outstanding receipt or outstanding deposit.
It is also possible that the amount you record in your accounting records does not match the actual transaction.
For example, you wrote a cheque for $70.70, which cleared your bank account correctly, but, in your accounting records, you recorded the cheque as $70.07. Your records for this account would reflect a cheque for $0.63 less than the actual amount cleared from your account and would be overstated (i.e., the balance is too high). The only way to identify these types of errors would be to compare your bank statement against your journal.
3Why do I need to reconcile bank accounts?
A monthly reconciliation of all trust accounts is requiredunder By-Law 9.
If you hold funds in trust for your clients, you have a fiduciary duty to account for the amount you effectively owe to clients. This duty is formalized under s. 14 of By-Law 9, which requires you to maintain a sufficient balance of funds in your trust bank account to meet all of your trust obligations at any given time.
The only way to ensure that you hold a sufficient balance of funds in trust is to reconcile each trust account on a regular basis and correct any differences that occur as a result of any item, as noted in Section 2, above. The mechanics of how to prepare the reconciliation and comparison is addressed below in Section 5, below.
Subsections 18(8) and 22(2) of By-Law 9 together require that the reconciliations and comparisons of all of your firm's trust accounts be prepared monthly and completed within 25 days of the end of the period covered by the financial institution's monthly statement. For example, your reconciliation for the month of March 2012 (the period from March 1 to March 31, 2012) must be prepared by April 25, 2012.
NOTE: You must reconcile each trust bank account, including interest-bearing accounts, GICs and term deposits every month, even if you did not have any trust activity for a particular month.
A reconciliation will enable you to evaluate the integrity of your procedures over your accounting for bank accounts.
If you delegate any of the duties of operating and maintaining a bank account (preparing documents, recording transactions or handling funds) to any other members or employees of your firm, the reconciliation can serve as a method of evaluating whether these duties are performed correctly. The errors and/or differences that are identified in a reconciliation may help you to identify concerns with any internal controls that you have in place over all bank accounts. Additional delegation issues are addressed in Section 6, below.
NOTE: There are no requirements to formally reconcile a general operating account. However, it is prudent to reconcile all of your bank accounts to ensure that your records and your bank records agree. Reconciling the general account is also important if you delegate any control over the account (signing authority or handling of funds) to an employee.
4What documents do I need to prepare the trust accountcomparison and reconciliation?
In order to prepare a reconciliation of your trust account, you will need the following records, each of which is required under s. 18 of By-Law 9 (sample documents are available in the Law Society’s Bookkeeping Guide):
Trust bank statement (By-Law 9, s. 18(10))
Statement of activity or other confirmation of the balance of funds held in a trust account (mixed trust, separate interest bearing accounts and investments) as provided by the financial institution where the funds are physically held.
NOTE: It is critical that you ensure you have a complete and original copy of your account statement activity in order to reconcile your account. If you do not receive paper statements from your institution and/or access account information electronically, ensure that you obtain and make a copy (electronic or paper) of the account activity statement directly from your institution's banking system.
Cancelled cheques and payment confirmations (By-Law 9, s. 18(10))
Original or electronic image copies of all cheques and the confirmation of electronic withdrawals (if applicable) that have been processed through the account.
If you choose to maintain imaged cheques in an electronic format, check with your financial institution to determine how long the images will be accessible through the financial institution's website, and if necessary, make arrangements to download the images for compliance purposes. You must ensure that the cheque images (both front and back of the cheque) can be printed, if required, during the 10-year retention period and that printed images will be legible. For more information on cheque images and record keeping requirements please view the Books and Records FAQs.
Detailed deposit slips and deposit confirmations (By-Law 9, s. 18(10))
The original copies of records that show deposits made to your account.
This can also include any confirmations received from your financial institution, including slips from an ABM, or from third parties who make deposits to the credit of your account.
Deposit slips for your practice bank accounts must be detailed showing
- the source of the money received, i.e., the person from whom you received the money
- the name of the client on whose behalf you are depositing the money
If you deposit funds through an automated teller machine (ATM), the bank receipt should be attached to the deposit slip for that deposit, or the source and client name should be written on the ATM receipt and included with your financial records.
Trust journals (By-Law 9, ss. 18(1)–(2))
A book of original entry identifying
- each date on which money is received or disbursed in trust for a client
- the method by which the money is received or disbursed (e.g., cheque, bank draft, cash, wire transfer, etc.)
- the purpose for which the money is received or disbursed
- the person from whom money is received or to whom funds are disbursed
- the amount of money received or disbursed
- the client for whom money is received in trust or disbursed
- number of the document you used to make the payment (e.g., cheque number, bank draft number, electronic trust transfer requisition number, etc)
The balance of all transactions (total receipts less total disbursements) recorded in the journals should be determined at the end of each month.
Client trust sub-ledgers (By-Law 9, s. 18(3))
A final book of entry maintained separately for each client or each client matter recording
- all money received in trust
- all money disbursed from trust
- any remaining balance
The sources of these entries are the trust receipt and disbursement journals. All transactions from the trust journals that pertain to a particular client matter are grouped together in the sub-ledger.
5How do I perform the trust reconciliation and comparison?
Computerized vs. manual environments
If you use a computerized accounting system, your system may be equipped with a reporting feature that allows you to prepare and store reconciliations in the system. Please be sure to read your user guide and/or seek assistance from your bookkeeper, accountant or software provider prior to using the reporting function for reconciliation purposes.
Whether you prepare the reconciliation manually or within your accounting system, you must be sure that the report generates sufficient detail to meet the minimum requirements of s.18(8) of By-Law 9:
- A record showing a comparison made monthly of the total of balances held in the trust account(s) and the total of all unexpended balances of funds held in trust for clients as they appear from the financial records (journals and sub-ledgers) together with the reasons for any differences between the totals, and the following records to support the monthly comparisons:
- a detailed listing made monthly showing the amount of money held in trust for each client and identifying each client for whom money is held in trust (client trust list)
- a detailed reconciliation made monthly of each trust bank account.
Prepare the client trust list
A client trust list identifies the total of all funds held on behalf of each client as at a particular point in time. Each client sub-ledger with a balance as at the end of the month reconciled is placed on the list. The client name and balance of funds held in trust according to the sub-ledger are listed on the report, with a total of all client trust sub-ledger balances at the end of the report.
Here are the specific steps to prepare the list:
- From the clients' trust ledger, identify any client balances that existed at the specific month end and list the client names in a logical order (e.g., alphabetically or by file number) along with the unexpended trust balance as at the month end.
- Include the last activity date for each client's trust balance on the list to help you to monitor inactive or dormant amounts.
- Add the amounts of each sub-ledger in the client trust listing and identify the total amount for all clients at the bottom of the list.
Note that the total of all client trust sub-ledger balances on the client trust list should equal the balance of the trust cash receipts and disbursement journals. Any difference between the two could indicate the existence of a posting error. See the sample trust reconciliation to view a complete trust listing.
Verify receipts and cheques processed by the bank against the journal
With your bank statement, cashed cheques, deposit confirmations and journals, do the following:
- check all returned cheques or cheque images against the amounts on the bank statement for the previous month, noting any discrepancies
- check off all of the deposits credited on your bank account statement against your duplicate deposit slips and other deposit confirmations and your trust bank journal, noting any differences
- identify any cheques you have issued that have not yet cleared the bank
- list the outstanding cheques by cheque number, date of issue, payee and amount
- list any deposits for the previous month, by date and amount, that are not recorded on the bank statement—these are your outstanding deposits
- list any bank errors and/or posting errors individually by date of occurrence and provide a brief explanation and the date of correction (which should be before the following month end)—a copy of any supporting documentation, such as a bank memo, should be attached to your reconciliation.
Reconcile and compare bank balance with journal and trust listing balances
To obtain a reconciled bank balance, take the ending balance of the trust bank statement and
- subtract the amount of the outstanding cheques
- add any outstanding deposits
- adjust for any bank and posting errors
Take your journal balance for the end of the period and compare this to the total balance on your client trust list (total of all unexpended balances in your client trust sub-ledgers). These two amounts should be the same. From your journal balance, add or subtract any posting errors to arrive at your reconciled journal/trust sub-ledger balance.
Now compare the reconciled bank balance and the journal/trust listing balance.
|Compare Reconciled Bank Balance with Journal/Trust Listing Balance
|Ending balance from bank statement
- Outstanding cheques
+ Outstanding deposits
+ Bank service charges
+/- Any other bank errors
Ending journal balance = Trust List Balance
+/- Any other corrections for posting errors
+ Deposits made but not posted
- Cheques issued but not posted
|= Reconciled Bank Balance*
||= Reconciled Journal/Trust Sub-ledger balance *
* If there is any difference between these two totals, youmust investigate and provide an explanation for that differenceregardless of the amount. Every cent in the trust account must beaccounted for.
Explain and correct any differences
As noted above, all differences must be explained. Under s. 14 of By-Law 9, you are required to have a sufficient balance of funds in your trust bank account to meet all of your trust obligations at any given time. Therefore, you must make arrangements to correct any discrepancies identified in reconciling your trust account as soon as they are identified.
NOTE: Most financial institutions will only correct errors if they are notified within 30 days from the date the statement is issued. Therefore, to avoid having to deposit your own funds to correct errors made by your financial institution, you must reconcile your account as soon as possible, following receipt of your monthly account statement.
6What are some tips that may be useful to me inpreparing or reviewing trust reconciliations and comparisons?
Look at last month's reconciliation and comparison
When preparing or reviewing a trust reconciliation and comparison, it is helpful to have the previous month's reconciliation and comparison on hand to identify what items outstanding in that month have not been cleared as of the present month.
Choose a statement end date
When you set up your account, the bank or financial institution will ask you to choose the frequency of your statements as well as the end date for your statements. Since you are required to reconcile your trust account on a monthly basis, it is best if you arrange to have account statements mailed to you on a monthly basis or arrange to pick them up at your financial institution. You may also need to specify whether you want the monthly period to be from the first day of a month to the end of a month, rather than a four-week period that spans over two calendar months. A statement that shows the activity for the calendar month is ideal.
Depending on the volume of activity in your account, you may wish to reconcile the account more often than once a month. While this is not required, you may request statements on a weekly basis rather than on a monthly basis. You also may have the option of viewing your account activity online (covered below).
Access a bank account using the Internet (online)
Most major financial institutions will offer you on-line access to your account, whether it is a trust or general operating account. This is an excellent tool for monitoring the balance of your account at various points in time, e.g., to identify whether a deposit made or a cheque written has cleared your account. It is also helpful if you find that your institution takes too long to send out your monthly statement and you would like to reconcile your account promptly after your month end. Receiving your trust bank statements late in the month does not relieve you of your obligation to complete the reconciliation and comparison within 25 days of the month end. You may also find that opting out of paper-based statements may reduce your service charges.
If you have a trust account with online access, please be sure to establish password controls over the account to prevent any unauthorized access to the account by a member of your staff, or anyone else without signing authority. Also, if you withdraw or transfer funds electronically from your trust account, it must be in accordance with the requirements of s. 12 of By-Law 9.
Carefully review the work of others
Depending on the structure of your firm, you may choose to delegate the preparation of the monthly reconciliations and comparisons to a staff member, your bookkeeper or accountant. When you delegate some or all of the tasks in reconciling a trust account, it is critical that you review each reconciliation and comparison in detail each month.
Take extra caution to ensure that you are provided with original copies of bank statements or reports when reviewing your monthly reconciliation. If you do not receive paper statements, be sure to access and print off your account information for the reconciliation period personally, rather than rely on copies of statements provided by those who prepared the reconciliation.
Always remember: It is your responsibility to ensure that there are sufficient funds in trust to meet all of your trust obligations. Although someone else may prepare the reconciliation and comparison, any shortages or errors are ultimately your responsibility, and you are required to make up for any shortages.
If you do not understand items on the reconciliation prepared by someone else, ask the person(s) who prepared the reconciliation and comparison for clarification with supporting documentation.
The following are some things to look for when completing your review:
- Recurring bank or processing errors that are outstanding from month to month: These should be addressed as soon as possible to ensure that any errors caused by the financial institution are rectified by the institution. If they are recurring, it may indicate that the bank was never made aware of the errors. You should ask any responsible staff for confirmation that they sent instructions to the bank to correct the items.
- Unexplained items that appear in order to balance your records: These could signal that the person preparing the reconciliation is manipulating the records or not properly identifying the cause of any difference. No amount is too small to investigate—you must be able to account for every cent in a trust account.
- Frequent requests to cover shortages in trust: Regardless of the amount, any request made of you to cover shortages should be explained in detail and should be supported with documentation. If there are frequent requests made, it may suggest some manipulation of the account by a staff member or failure to record transactions properly.
- Overdrawn client sub-ledgers balances that reoccur from month to month: When you review your trust list, you should question why any trust sub-ledger became overdrawn. It may be that you or a staff member is not properly reviewing the balance of the sub-ledger for a client before issuing a payment from trust for that client. It may also be that all of the transactions are not recorded as they occur (i.e., not posted current). Any reoccurrence of overdrawn sub-ledgers should be a concern to you, regardless of the amount.
- Trust account disbursements posted with blank payee names or with generic names like “client” or “bank”: For all disbursements, you should see the actual name of the payee and the reason for the payment in the journal entry.
Statutes and Rules