Glossary
The vocabulary, in plain English
Trust accounting has a small vocabulary that carries a lot of weight. These are the terms as a bookkeeper uses them, defined so an attorney can read them between meetings.
Trust rules are set state by state and change. The definitions below are general; where a rule is named, it is named because that rule says so. Confirm the current requirement for your jurisdiction before relying on any of it.
- Client trust accountalso Trust account
- A bank account a law firm uses to hold money belonging to clients or third parties, kept separate from the firm's own operating funds. The firm holds the money and never owns it, which is why the records proving whose money it is matter as much as the balance.
- IOLTAalso Interest on Lawyers' Trust Accounts
- A pooled trust account for client funds that are small in amount or held only briefly. Interest earned goes to a state program funding legal services rather than to the firm or the client. Most small-firm trust accounts are IOLTA accounts.
- Three-way reconciliation
- A monthly check that three records agree to the penny: the trust bank statement, the firm's trust ledger, and the sum of every individual client ledger. Two records matching proves nothing if the third disagrees, which is why most state rules assume this version rather than a simple bank comparison.
- Two-way reconciliation
- Comparing only the firm's books to the bank statement. It proves the firm's records match the bank's records, and says nothing about whose money the account holds. A firm can pass a two-way check every month while individual client balances are quietly wrong underneath.
- Trust ledgeralso Trust journal, check register
- The firm's own running record of every deposit into and disbursement from the trust account, in date order. It is the firm's version of the account's history, kept independently of the bank's statement so the two can be compared.
- Client ledgeralso Client-matter ledger
- A separate running balance for each client or matter, showing every transaction affecting that client's money and what remains. Added together, the client ledgers should equal the trust account balance. This is the record that answers the question a bank statement cannot: whose money is this.
- Commingling
- Mixing client money with the firm's own money in either direction: depositing client funds into the operating account, or leaving firm money in trust beyond what the rules allow. Brief or accidental commingling still counts, and it is among the most common threads running through trust-related discipline.
- Earned and unearned fees
- Money a client pays in advance is unearned, still belongs to the client, and is held in trust. It becomes the firm's money only as the work is performed, at which point it is transferred to the operating account. Moving it before it is earned is a violation regardless of intent.
- Segregation of duties
- A control in which the person who moves money is not the person who records or reviews it, so an error has a second set of eyes to catch it. Inside a small firm this is difficult to arrange, which is why an outside monthly reviewer is often the practical form it takes.
- Trust overdraft
- A transaction that would take the trust account, or an individual client's balance within it, below zero. Banks holding IOLTA accounts generally must report overdrafts to the state bar, which makes an overdraft one of the fastest routes from a bookkeeping error to a regulator's attention.
- Negative client balance
- When disbursements against one client's matter exceed what that client holds in trust, which means another client's money paid for it. The overall bank balance can look perfectly correct while this is true, which is precisely why client-level ledgers exist.
- Exam-ready
- Records kept in a state where they could be handed to a regulator as they are, with no cleanup project first. It describes a condition of the records, not a credential held by anyone.
- Exception register
- A written record of anything that did not reconcile, with its cause and its resolution. It turns a discrepancy from something remembered into something documented, which is the difference between a note and a record.
- Evidence archive
- The monthly set of documents supporting a reconciliation: bank statements, ledgers, reconciliation reports, and source documents, retained so a later question is answered from records rather than memory.
- CTAPPalso Client Trust Account Protection Program
- California's annual trust account compliance program. It requires licensees to register their IOLTA and non-IOLTA accounts with the State Bar, complete a self-assessment of trust account management practices, and certify compliance with rule 1.15 of the Rules of Professional Conduct. The reporting deadline is March 30.
- RPC 1.15A and RPC 1.15Balso Washington trust account rules
- Washington's trust account rules, and a pair worth keeping straight. RPC 1.15A carries the safekeeping duties: how client property is held, and the obligation to reconcile. RPC 1.15B, titled Required Trust Account Records, specifies which records a firm must maintain and how long to keep them, which is seven years.
Where do your records actually stand?
Every term here turns into a specific question about your own books when we talk.