An IOLTA reconciliation proves, once a month, that three records agree: the bank statement after timing items, the trust account journal, and the sum of every client ledger. Adjust the bank balance first, correct the journal for charges the bank posted, then total the client ledgers. If all three figures match, sign, date and file the result.
What does an IOLTA reconciliation have to prove each month?
An IOLTA reconciliation has to prove that the pooled trust account holds what the firm says it holds for clients, and that each client's share is known. IOLTA stands for Interest on Lawyers' Trust Accounts: a pooled account for client funds that are small or held briefly, whose interest goes to a state program rather than to the client.
The proof rests on three records. The bank statement is the bank's view of the account. The account journal is the firm's own running record of every deposit and disbursement for that one bank account. The client ledgers are one record per client, or per client and matter, showing what the firm holds for that person. The State Bar of California's 2023 Handbook on Client Trust Accounting describes the monthly reconciliation as checking those three records against each other so mistakes can be found and fixed. California's rule 1.15 requires a written record of that work each month. Other states set their own frequency and form, so read your own rule before you settle on a schedule.
Why a matching bank balance is not enough
A trust account can agree with the bank and still be wrong. Suppose a paralegal posts a 1,000.00 receipt to the wrong client. The journal total is right, the bank total is right, and one client now shows 1,000.00 too much while another shows 1,000.00 too little. Only the ledger listing exposes it. The handbook gives a similar case: a 1,000.00 deposit entered as 10,000.00 on a client ledger cannot be found unless the ledger is compared to the journal, and the journal to the bank.
That is why the work below runs in three steps, and why skipping the ledger total turns a trust reconciliation into an ordinary bank reconciliation. Keeping the ledgers themselves in good order is its own job; how to keep a client trust ledger with running balances covers the entries each one needs.
Step 1: adjusting the IOLTA bank statement balance
The IOLTA bank statement balance is adjusted by adding deposits the firm made that the bank had not yet credited by the statement date, and subtracting trust checks and transfers the firm issued that had not yet been paid. The result, the adjusted bank balance, is what the account would hold if every item had cleared.
Start with the closing balance printed on the statement. Before you rely on it, confirm the statement itself is complete: the opening balance should equal last month's closing balance, and the opening balance plus deposits less withdrawals should equal the closing balance. A missing page or a statement period that skips a day will break that arithmetic.
Then work the timing items:
- Deposits in transit. List each deposit recorded in the journal on or before the statement date that does not appear on the statement. Settlement checks deposited on the last business day are the usual case.
- Outstanding checks. List each trust check written on or before the statement date that the bank has not paid. Give the check number, date, payee and amount.
- Outstanding electronic payments. List any wire or ACH disbursement the journal shows but the statement does not. These should be rare, because electronic payments usually post the same day.
Each item on these lists needs a date. A deposit in transit that is still missing from the next statement is no longer a timing item. It is a question for the bank or a sign the deposit never happened. An outstanding check that sits for months belongs to a payee who may never cash it, and it still counts as that client's money until it clears or is dealt with under your state's rules.
Step 2: tying the IOLTA account journal to the adjusted bank figure
The IOLTA account journal is tied to the adjusted bank figure by first recording anything the bank did that the firm has not yet written down, such as a wire fee or a returned deposit. Once those entries are made, the corrected journal balance should equal the adjusted bank balance to the cent.
The handbook's four-step method puts this entry work before the comparison. Read every line of the statement that is not a cleared deposit or a cleared check, and decide where it belongs:
- Bank charges. A monthly service fee, a wire fee or a returned-item fee must be recorded. In a pooled account, it should be paid from the firm's own small cushion or charged to the operating account, never from a client's balance. Who pays bank fees in an IOLTA account sets out the options.
- Returned items. A client's deposited check that bounced reduces that client's ledger and the journal. If the firm already paid out against it, the reconciliation has found a shortfall, not a timing difference.
- Interest and program remittances. On an IOLTA account the interest is not the client's or the firm's. The California handbook notes that an IOLTA statement may show interest paid to the State Bar and amounts charged to the State Bar, and says those lines should not be entered in the account journal.
- Bank errors. A deposit credited to the wrong account, or a check paid for the wrong amount, is a bank-side reconciling item. Record it on the reconciliation, contact the bank, and do not change the journal to match the bank's mistake.
After the entries, compare the corrected journal balance to the adjusted bank balance. If they differ, look for a journal entry with the wrong amount, a check recorded in the journal but voided in fact, or a deposit recorded twice. Fix the cause before you move on. Never post a balancing entry to make the two agree, because that hides the very error the rule wants found.
Step 3: totaling IOLTA client ledgers against the journal
The IOLTA client ledgers are totaled by listing every open client balance as of the statement date, including the firm's own cushion for bank charges as a separate line. The total of that listing must equal the corrected journal balance and the adjusted bank balance. When it does, the reconciliation has proved all three agree.
Print or export the balance of each client ledger as of the last day of the month, not as of today. Ledgers that were updated after month end will show later activity and make the listing disagree for reasons that have nothing to do with errors.
A worked example month
The figures below are an example for a fictional firm, Harbor Lane Law, for March. They are illustrative only.
| Record | Item | Amount |
|---|---|---|
| Bank | Closing balance per IOLTA statement, March 31 | 48,215.40 |
| Bank | Add deposit in transit, settlement check deposited March 31 | 3,500.00 |
| Bank | Less outstanding check 1187, medical provider | -2,750.00 |
| Bank | Less outstanding check 1190, court filing service | -400.00 |
| Bank | Adjusted bank balance | 48,565.40 |
| Journal | Balance per account journal before review | 48,580.40 |
| Journal | Less wire fee on statement, not yet recorded | -15.00 |
| Journal | Corrected journal balance | 48,565.40 |
| Ledgers | Client Ruiz, personal injury matter | 22,000.00 |
| Ledgers | Client Okafor, real estate closing | 18,450.00 |
| Ledgers | Client Tran, estate matter | 8,030.40 |
| Ledgers | Firm funds held for bank charges, after the wire fee | 85.00 |
| Ledgers | Total of ledgers | 48,565.40 |
All three figures are 48,565.40, so the month reconciles. Note where the wire fee went. It reduced the journal and the firm's bank-charge line, not any client's ledger. Had it been posted against Client Tran, the total would still balance, but Tran's money would have paid the firm's bank fee.
Reading the listing, not just its total
A total that agrees can hide a ledger that does not. Read down the listing as well as across it. Look for any balance below zero, any client whose matter closed months ago, and any balance that has not moved in a long time. Each of those is a question for the responsible lawyer, even when the arithmetic is clean.
Which IOLTA reconciliation differences should never be carried forward?
An IOLTA reconciliation difference should never be carried forward when it means client money is missing, misassigned or mixed with the firm's own funds. A negative client ledger, an unexplained shortage, a deposit nobody can identify and a firm cushion that has grown past what bank fees need all call for action in the month they appear.
Ordinary bank reconciliations sometimes carry a small unexplained difference while someone investigates. A trust reconciliation cannot treat any of the following that way.
A client ledger below zero
The California handbook is blunt that client trust accounting has no such thing as a negative balance: a balance below zero is a sign of negligence at best. In a pooled account, a negative ledger means one client's money paid another client's costs. The usual causes are a check written before the client's deposit cleared, a cost paid for the wrong matter, or a disbursement posted twice. What causes a negative client trust balance and how to cure it walks through the correction.
Money nobody claims
If the bank and journal agree but the ledgers total less, the account holds money not assigned to any client. That is often a receipt left unapplied. It can also be earned fees the firm never withdrew, which is a commingling problem. Commingling trust funds and where the line sits explains why leaving fees in trust is itself a violation.
A shortage that recurs
A shortage that appears, is fixed, and appears again in a later month is a pattern. It may come from a process gap, such as releasing settlement funds before deposits clear, or from someone taking money. Either way, the reconciliation file should show each occurrence, the cause found, and who approved the fix.
Documenting the IOLTA reconciliation for a bar audit
Documenting the IOLTA reconciliation for a bar audit means keeping, for each month, the bank statement, the adjusted bank figure with its lists of timing items, the corrected journal balance, the dated client ledger listing, and the name and signature of the person who prepared it and the person who reviewed it.
A reconciliation that cannot be shown did not, for an auditor, take place. Keep each month's package together, in the same order every month:
- the bank statement for the month and the check images the bank provides
- the lists of deposits in transit and outstanding checks, each item dated
- the journal entries made during the reconciliation, with the statement line that prompted each
- the client ledger listing as of the statement date
- a one-page summary showing the three equal figures, signed and dated
California's handbook allows the work to be done by a supervised bookkeeper or with software, but says the lawyer stays personally responsible and should understand the process well enough to supervise it. A reviewer's signature means more when the reviewer did not also prepare the reconciliation or sign the trust checks.
Bar auditors approach a trust file much as a financial auditor approaches cash: they test whether the reconciling items were real and whether they cleared afterward. Audit procedures for bank reconciliation, with a sample program shows that method from the auditor's side, and it is a useful way to review your own file before anyone else does.
PreciseBankFlow can take the first step off your hands. It reads each IOLTA statement, proves the opening balance plus deposits less withdrawals equals the printed closing balance, matches statement lines to your trust register to show what cleared, and flags duplicates and gaps in check numbers. The client ledgers stay in your trust accounting system. Request early access if the statement work is where your month-end time goes.