Handling Two Party Checks

In the construction industry, the bookkeeper will occasionally have to handle receiving a "two-party check." A two-party check is payable to two companies, usually the prime contractor and a materials supplier, or other subcontractor. The reason is most often 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.

Here is our suggestion for how to handle two-party checks.

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 and they should deposit the check into their bank account.