How to record bank errors when performing a trust reconciliation
Last updated
Last updated
Accounting for lawyers in Ontario can be confusing, so let’s use a simple example.
Lucy Lawyer receives a cheque in the amount of $65 from her client on January 15, and the money needs to be put into Lucy’s trust account.
To keep things simple, let’s say Lucy deposits the money into her trust account on the same day, and the cheque clears instantly. Lucy also diligently records the deposit into her trust ledger as well, which is easy if she uses . To keep things really simple, let’s say this deposit is the only activity in Lucy’s trust account.
When Lucy sits down to do her trust reconciliation in February, using an “as at” date of January 31, she sees that all is well. Her trust listing report says that she has $65 in trust. Her closing balance on January 31, according to her bank statement, is also $65.
Now, let’s modify the scenario to involve a bank error.
Let’s say that Lucy’s bank accidentally cleared Lucy’s client’s cheque in the wrong amount. Her bank incorrectly put $56 into Lucy’s trust account instead of the $65 that should have been put in.
In this modified scenario, the amount of the bank error is $9, and the error caused Lucy’s trust bank balance to be smaller than it should have been. When she sits down to do her trust reconciliation in February and she discovers the error, she’ll need to do a couple of things.
First, she’ll need to correct the error immediately. She might want to contact her bank so that they can fix the error, or she can transfer funds from her law firm’s general account into the trust account, and write a memo explaining the situation.
Second, she’ll need to ensure that her trust reconciliation accounts for the bank error. Remember, the trust reconciliation is focused on the “as at” date, which is January 31 in this example. Just because Lucy fixes the error in February doesn’t deal with the fact that the error was present on January 31. That’s why her trust reconciliation needs to record, and account for, the bank’s error.
Fortunately, Lucy uses TrustReq, which makes performing her trust reconciliation a breeze. From the "Create a Trust Reconciliation" page, when Lucy clicks on the “Make adjustment due to a bank error” button, and she fills out the relevant fields, TrustReq would, in this example, add $9 to Lucy’s “reconciled mixed trust bank balance”. Conversely, if the bank error had caused Lucy’s trust account to be larger than it should have been, then TrustReq would subtract from (rather than add to) the bank balance.
If that sounds confusing, remember that a “reconciled mixed trust bank balance” is just Lucy’s trust account balance from her bank statement, but with money added or subtracted. Money is added and subtracted to account for common sense things like cheques that haven’t yet cleared, outstanding deposits, bank errors, and anything else that could cause the bank statement to not exactly match Lucy’s . If Lucy’s law practice is busy enough, her trust bank balance will almost never match the Trust Listing Report, and that is normal. Although normal, that reality is why a “reconciled mixed trust bank balance” must exist. The word "mixed" in that phrase simply refers to the fact that many different clients' trust funds are all mixed together into one bank account, which is how most lawyers practice law.
Remember, when performing a trust reconciliation, the reliability of TrustReq’s calculations will only be as good as the accuracy of the information you enter. If you accidentally tell TrustReq that “The error caused the bank balance to be larger than it should be” when you meant to say “The error caused the bank balance to be smaller than it should be”, then TrustReq will make an adjustment in the wrong direction.