How To Set Up And Use PayPal In Quickbooks

Disclaimer: Before you begin, please be advised that we are not CPA's and are not offering financial advice and we are in no way responsible for the information contained within this writing. The screen shots shown in this article are from QuickBooks Pro for Mac 2009 and may differ slightly from other versions and platforms.

 

One of the most common questions that Quickbooks users have is how to set up PayPal in Quickbooks. The confusion usually occurs because many people don't understand how to manage the transaction fees in Quickbooks. I've seen many attempts at a solution while browsing the Quickbooks Community forums. For example, adding a negative amount in the Invoice or apply a discount in the Receive Payments screen, however, both of these will result in changing your copy of the invoice and a tireless amount of time trying to juggle numbers where your accounts will stay in balance between Quickbooks and your "online" PayPal balance.

 

After a few hours of pondering through the QuickBooks community forums, the idea dawned on me why not just treat PayPal as a bank account. After all PayPal is what one may consider a "financial institution." After the initial set up (described below) receiving, sending and transferring money between customers and your bank account can become an accurate and time saving process.

 

THE INITIAL SETUP

First, there are but a couple of initial steps that you will only have to perform once. Afterwards you can easily enter PayPal transactions just as you would do with any standard bank account. This includes invoicing, receiving payments and transferring funds between PayPal and your actual bank account.

 

For our example we will assume that your PayPal starting balance is $0

 

1. BACK UP YOUR COMPANY FILE

2. In Quickbooks, you will need to define a new payment type. By default you already have Cash, Visa, Check etc, however, we need to add PayPal. So, click on Lists->Customer & Vendor Profile->Payment Types and add PayPal as a payment type.

 

 

3. Next, click on Lists->Chart Of Accounts

4. Add a new BANK account called PayPal Account, the starting balance and start date (preferably today's date).

 

 

5. Add a new EXPENSE account and name it PayPal Fees.

 

 

RECEIVING PAYMENTS

In this example lets assume that you send an invoice to ACME for $100 and they send the $100 payment to you via PayPal where you are charged a $5 fee. We are going to receive this just like any other payment, however, we are going to apply it to your PayPal Bank Account.

 

1. Go To Receive Payments and enter the information as you normally would. However, for the Payment Type select PayPal.

2. For the Amount enter the full amount of the payment that you received from the customer in this example $100.

3. Forget about the PayPal fees, this will be handled later.

3. In the Deposit To: Pull-Down select the "PayPal" (bank account you created) from the list.

4. Once you have reviewed the information click ok to record it.

 

 

At this point, if you look at your chart of accounts under your PayPal bank account, it will be increased (in this example by $100)

 

RECORDING THE TRANSACTION FEES

Next, we have to account for the PayPal Transaction fees. Although there are other ways to record this, I just prefer to use the Write Check Method. Again, for the sake of example, lets assume there was a $5 transaction fee.

 

1. Go to Banking->Write Checks

2. In the first pull down list, Bank Account:, select "PayPal"

3. For the Payee enter something like PaySystems. For the amount enter the transaction fee from PayPal ($5 from our example) and in the memo field type in something like "ABC Fence - PayPal Fees"

4. In the last Account pull-down box select "PayPal Fees" as the expense account.

 

 

At this point, from our example, your PayPal Bank Account (income) would show a balance of $95 and your PayPal Fees Account (expense) will show a balance of $5. If we started with a $0 balance, your balance in Quickbooks and Your online PayPal account would both balance at $95.

 

TRANSFERRING FUNDS BETWEEN YOUR BANK AND PAYPAL

During your regular accounting you may decide at some point that you may need to transfer funds from PayPal to your Credit Union/Bank or vice versa. By creating a PayPal BANK account in Quickbooks this is a piece of cake to keep your books accurate. Again, from the example, lets assume you want to transfer the $95 that you have in your PayPal Account to your Credit Union/Bank.

 

1. In PayPal transfer the funds from PayPal to your bank as you would normally do.

2. In Quickbooks, click on Banking->Make Deposits

3. In the first Deposit To: Pull Down select your Credit Union/Bank from the list

4. In the Received From Pull Down select the name of the Customer that sent you the payment (optional)

5. In the From Account field select "PayPal" (i.e. the PayPal BANK account you created in quickbooks)

6. In the amount field, in our example, we would put $95

 

 

Once you record the deposit, you can look at your Chart of Accounts and see where $95 was deducted from your QuickBooks PayPal BANK account and was added to your CREDIT UNION/BANK account. You would of course do this in reverse in the even that you transferred money from your Credit Union/Bank to PayPal online.

 

FINAL THOUGHTS

As you can see from the examples, above, by creating a Bank and Expense account for PayPal you can record the full payment that the customer made and it is deposited into your PayPal Quickbooks Bank Account and the PayPal transaction fee is recorded in your PayPal Fees account. In addition, transferring monies from your PayPal account to your Credit Union/Bank, or the reverse, using this method can easily help keep all of your account balances in check. One last note, when setting up your PayPal Bank and Expense account you will need to set the Tax schedule for these items. In addition, make sure that if you earn dividends from PayPal that you enter those in QuickBooks as well.

 

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