PayPal in your books

A PayPal balance is cash. It gets its own cash account, Cash – PayPal, and sits on the balance sheet next to the bank accounts. Money can arrive, be spent and be withdrawn without ever touching the bank, so leaving it out understates cash and hides the fees.

In the example, a customer pays a $1,000 invoice and PayPal keeps $35.39, so $964.61 lands in the PayPal balance. The entry clears the full $1,000 receivable, books the $35.39 as a payment processing fee, and adds $964.61 to Cash – PayPal. Revenue was booked when the invoice went out, so nothing here touches it.

When you later move that $964.61 to the bank, the entry debits the bank account and credits Cash – PayPal. It's a transfer between two of your accounts and adds no income. A vendor paid straight from the PayPal balance is an expense with Cash – PayPal as the credit. Payments in other currencies should land at the dollar amount PayPal actually credited.

Reconcile Cash – PayPal to PayPal's statement ending balance, the way you would a bank. Money still sitting in PayPal at month end is part of your cash. Then check that the processing fees in the books match the fee total PayPal reports for the month.

Reconciliation applies to PayPal the same as to a bank. Stripe balances work in a similar way, with the deposit split into its parts.