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Handling PayPal Payments in QuickBooks

Many companies today are selling online.  Now we all know that when we sell online, we need to take payment via Credit Card from our customers.  Many companies choose to use PayPal as their merchant processor for their website but are unsure of how to handle the tracking of PayPal in their QuickBooks.  Here are some tips: (Click on the images to see a larger view)

You can actually enter in your PayPal transactions a few different ways.  For all the different ways, you first need to create 2 accounts in your Chart of Accounts.  The first account is a Bank Account called PayPal.  The other one is an Expense Account called Merchant Service Fees or PayPal fees.

Here is option 1:

Enter in a Sales Receipt into QuickBooks for each sale using the actual items from your item list that the customer purchased.  (This will give you an accurate ‘Sales by Item’ report that can be very handy to have.)  At the end of each sales receipt, enter in a Subtotal if you have multiple items and then enter in an item called “PayPal fees”.  (Create this item as an ‘other charge’ in your Item list and map it to the Merchant Service Fees expense account.)  Once you put this line on the Sales Receipt, put in the dollar amount of the fees that were withheld as a negative amount.  Your total on your Sales Receipt should now reflect the total sale less the fees therefor giving you just the amount that PayPal deposited into your PayPal account.  Make sure to choose to Deposit to the PayPal Bank account.  The downside to this process is if you want to give a copy of the sales receipt to your customer, they will be able to see all your PayPal fees.

Option 2:

Enter in a Sales Receipt into QuickBooks for each sale using the actual items from your item list that the customer purchased.  (This will give you an accurate ‘Sales by Item’ report that can be very handy to have.)  If using a Sales Receipt, choose “Undeposited Funds” in the Deposit to field.  If using Invoices, you then need to receive the customer payment in the Receive Payments screen and make sure the payment is going to Undeposited Funds.  Now, to record the actual deposit, go to Banking>Make Deposits and you will see a screen listing all your PayPal payments.  Click off the individual Payments that you want to deposit into the PayPal account and click ok.  Make sure the Deposit to field says “PayPal” and on the last line of the deposit, enter in “Merchant Service Fees” in the From Account column and add in the fees withheld as a negative number.  Your total on your Deposit should now reflect the total payments received less the fees therefor giving you just the amount that PayPal deposited into your PayPal account.  The downside to this process is that although you will have a clean Sales Receipt or Invoice to show your customer, it takes a bit more work on the bookkeeping side to make sure you move each payment over to the PayPal account properly.

Option 3:

Create your Sales Receipts and Invoices just like option 2 and have all the payments go directly into the PayPal bank account instead of Undeposited Funds.  Then, on a regular basis, add up all the fees that have been withheld during that time and create one check out of the PayPal account for the total amount of the fees, posting to Merchant Service Fees.  This will bring your PayPal account balance on track.  The downside to this option is although it’s a bit faster in the data entry party, it will be difficult to reconcile the account on a regular basis as the entry is not following the statement exactly as it appears.

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8 Responses to Handling PayPal Payments in QuickBooks

  1. Aileen says:

    Hi Thank you for this information.
    I currently use Option 2.
    My question is: the Merchant Service Fee which is listed as negative in Make Deposits then appears in the Merchant Service Fee account as positive balances or deposited funds.
    How do I deal with this?

  2. Alicia says:

    Hi Aileen,

    What you are seeing is correct. When you run a PL and most transaction reports you will see the amounts listed as a positive. These fees are an expense to your business and thus a debit to that account. There are a couple ways to assure you this is working properly. When you are looking at a saved deposit with an associated fee, select “Journal” at the top of that screen. This will give you the debits and credits for that transaction. Another thing you can do is run a PL, drill into “double click” on total expenses. Review the list and you should see that all the expenses are listed as a positive along with these Paypal expenses.

    Hope this helps. Let me know if you need additional clarification.


  3. Ron Patla says:

    Hi Alicia,

    I’m hoping you can help with a PayPal payments question.

    Most of my sales are drop shipped so for each transaction I have an invoice for the sale and a PO to our vendor for the order. I’m using method 1 for PayPal sales except I use invoices.

    On my non-PayPal transactions, the P&L report shows the sales income in the Sales Income account and shows the bill payment to the vendor in the COG account.

    On the PayPal transactions I’m seeing both the customer invoice and vendor bill in the Sales Income account. I haven’t been able to figure out why that is.

    In the example I’m looking at, the bill is for one ring and a shipping charge. The amount for the ring payment shows in Sales Income but the amount for the shipping shows in the COG.

    I get an order from a customer for an item. I make out an invoice. Then I make a PO for our vendor for that order. I pay the vendor by PayPal which takes the funds for payment from my checking account. In QuickBooks I record the bill payment for the vendor in the Enter Bills and Pay Bills sections using the PayPal account. Then I use Banking / Transfer Funds to show the transfer from my checking to PayPal to cover the bill payment.

    I’m trying to figure out why on these PayPal transactions the item payment is showing in the Sales Account and not the COG on the P&L report. If you have any ideas I’d sure appreciate the help!

    • Alicia says:

      Hi Ron,

      It sounds like what you are doing is exactly correct. Do you sell different items to your non-PayPal customers?

      If you do the only thing this could be is the accounts associated with the PayPal items you are referring to. The first thing you should either way do is open up your item list and see what COGS, Sales and Inventory Asset accounts the items are allocated to. In the desktop edition you add columns to easily review (right click on the header and select customize columns) for the online edition you may need to export your item list to see the allocations.

      If you find errors you can change the accounts. Be careful if you do specifically on the desktop edition. When you change them you will have the opportunity to affect the accounts going back to the beginning. Be sure before you do this you consult your accountant.

      Let me know if this resolves the problem.


      • Ron Patla says:

        Thank you Alicia! That was it. I had one item where I mistakenly entered in the expense account field the Sales Income Account rather than the COG account. It’s so obvious now that I see it. Thanks for the help.

        • Alicia says:


          Glad this did the trick. Wish they were all this easy…

          Good luck and let us know if you need anything else.


  4. How do I handle PayPal payments if the customer is responsible to pay the fees. I create invoices for the Item I am selling. When customer pays what appears to be the full amount of the invoice, he is still short because of the fees. Do I add an Item for the PayPal fees as a positive number to the invoice to show that this amount is still due?

    When I receive payment from customer, I receive the full amount into my PayPal bank account. When I transfer the PayPal funds into my checking account I enter the PayPal fees as an expense.

    Can you give me some guidance?


    • Alicia says:


      Handling the fees that way you are and adding it to the customer invoice is really the best way to handle it. You may also want to consider posting the item you use for invoicing to the same PayPal fee account you referenced. Ultimately you would show no expense if all money in and out was accounted for.

      Hope this helps.

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