Money held in trust belongs to someone else — your investors, your borrowers, or a borrower’s lawyer — until it is properly paid out. A three-way reconciliation is how you prove, every month, that the money is all there and that you know exactly whose it is.
What “three-way” means
A two-way reconciliation compares the bank statement to your books. A three-way reconciliation adds a third check: the sum of every individual client ledger must equal the same number.
| Part | What it is | Where it comes from |
|---|---|---|
| 1. Adjusted bank balance | The bank statement balance, plus deposits in transit, minus outstanding cheques or payments | The trust bank statement |
| 2. Book balance | The balance of the trust account in your trust journal | Your trust records |
| 3. Client ledgers total | The sum of what you hold for each lender, borrower, holdback or reserve | Your client sub-ledgers |
When all three agree, every dollar in the bank is accounted for and attributed to the right person.
Step by step
- Close the month in your trust journal. Record every receipt and payment dated in the month: borrower payments, lender advances, distributions paid, transfers of earned fees to operating, NSF reversals.
- Get the bank statement for the trust account to the last day of the month.
- Match bank lines to book entries. Tick off each deposit and withdrawal. Anything in the books but not yet in the bank is an outstanding item; anything in the bank but not in the books needs to be recorded (or investigated).
- Calculate the adjusted bank balance: statement balance + deposits in transit − outstanding payments.
- Total the client ledgers. For a lender, that is the money received from them for loans not yet funded, plus interest collected for them and not yet distributed. For a borrower, reserves or holdbacks you hold. Include the company’s own earned money still sitting in trust, shown separately.
- Compare the three figures. They should be identical to the cent.
- Have a second person review and sign the reconciliation, and keep it — with the bank statement and the list of outstanding items — as part of your records.
Common reasons it doesn’t balance
- Bank fees charged to the trust account. Trust money should not pay the company’s bank fees; record and correct them.
- A payment posted to the wrong ledger — the total still agrees, but one lender is overstated and another understated. Only the client-ledger check catches this.
- NSF reversals recorded in the bank but not the books.
- Earned fees left in trust and not shown as the company’s own balance.
- Timing differences not listed as outstanding items.
How Amortivo handles it
In Amortivo every borrower payment, lender advance, distribution, fee and transfer posts to the trust ledger automatically, with a sub-ledger for every lender and loan. You import the bank statement, lines are matched for you, and the monthly three-way reconciliation is prepared from the same records — then signed off by someone other than the preparer and kept as a PDF. See trust accounting.