STS Tax Talk: Receiving Two-Party Checks in QuickBooks -

Thursday, November 1, 2012

Receiving Two-Party Checks in QuickBooks -

There are times when you may receive a “two-party check”, often in the constructions industry. This is a check that is payable to two companies, usually the prime contractor and a materials supplier, or other subcontractor. Let’s take a look at how you would handle this in QuickBooks.

The most common reason for a two-party check is to ensure that the supplier is paid in a timely manner and that there is a direct link between the payment from the job and the payment to the supplier. It is also intended to prevent suppliers from attaching liens to the property by making it impossible for the prime contractor to fail to pay the supplier.

Start by sending the invoice to the customer just as you normally would. When you receive the payment (a two-party check), record the payment and deposit it to a “Trade Clearing” bank account. Next, record the bill from the supplier and pay the bill from the Trade Clearing account. Finally, send the endorsed check to the supplier. They should deposit the check into their bank account.

Let’s take a look at the detailed steps for how the general contractor above should handle the transactions in QuickBooks.

For our example you will do a job for customer “Bob Mason”.

You charge $1,000 for a “Custom Window” plus sales tax on an invoice to Bob Mason.

In this case you use a subcontractor, Ace Glass, to provide the materials for the job.

Ace Glass submits an Invoice to you, and you enter it as a Bill for $1,082.50 (use the Items tab).

Bob Mason (the customer) sends a check for $1082.50 to you (as the General Contractor), payable to both you (General) and Ace Glass (Supplier).

In QuickBooks, record the payment from the customer and deposit the payment into the Trade Clearing bank account. The result will be a debit balance in the Trade Clearing register in the amount of $1,082.50.

You will endorse the check and send it on to Ace Glass who will deposit it. Then you will use “Pay Bills” to record payment to Ace Glass for $1,082.50. This bill payment is recorded in the Trade Clearing bank account.

After recording all of the transactions above, you now have a zero balance receivable from the customer (Bob Mason), and a zero balance due to the vendor (Ace Glass).

The vendor (Ace Glass) shows the bill was paid out of the Trade Clearing bank account.

The Trade Clearing account shows the deposit from the customer, recording the receipt of the two-party check, and the bill payment to the vendor. These amounts zero out the balance of the Trade Clearing account.