Proper PayPal Processing in QBO

I just love the QBO Banking Center! As long as your bank is supported, you can connect your account(s), download and review transactions, and with one click add them to the account register. However, while you can connect your PayPal account, QBO doesn’t handle PayPal transactions properly in that it only downloads the net amount, not the fees (which you need to record as an expense because you need the tax deduction).

On the Apps website for QBO (Apps.com), there’s an app called Sync With PayPal. It’s written to download both your PayPal gross sales and fees, creating customer(s) and sales receipts as necessary. Unfortunately, what I’ve heard on all the Facebook and LinkedIn accounting groups to which I belong, is that this app simply does not work. Reading the reviews on Apps.com confirms these rumors.

So then how do you seamlessly import PayPal transactions into QBO? The answer is, you can’t. Unfortunately, the only way to accurately reflect sales by customer and your PayPal fees expense in QBO is to follow these steps:

  1. Make sure you have two accounts setup on your QBO Chart of Accounts: The PayPal account, and a PayPal Fees expense account.
  2. If the customer isn’t already in QBO, add them.
  3. If the sale hasn’t already been recorded in QBO for that customer, add the sales receipt using the gross amount of the sale. Post it to Undeposited Funds.
  4. Go into Undeposited Funds and make a bank deposit to your QBO PayPal account. Put a checkmark next to the customer transaction in the upper portion of the screen. Then in the lower portion, post the PayPal fee to your QBO PayPal Fees expense account, entering the fee amount as a negative number.
  5. The last step is to transfer the funds from your QBO PayPal account to your bank account(s). (This step assumes you’ve already transferred the funds on PayPal.com to your bank account.)

Following these steps is the only way you can accurately reflect both (a) sales by customer, and (b) your PayPal fees expense, in QBO.

Customer Records

After reading my last post covering the biggest QuickBooks mistake most users make, you may be wondering, “Why do I want to keep my customer records (QBO or Xero) updated anyway?”

The answer is that there are a multitude of situations where having information on each customer is highly useful in managing your business, increasing sales, and meeting your customers’ needs. Maintaining this information in Quickbooks allows you to generate several different important reports. It also enables you to quickly provide a customer with a copy of specific sales receipts or their entire purchase history. Finally, doing so can be beneficial in any kind of financial audit.

Biggest QB Mistake

The biggest or most common Quickbooks mistake that I see in my practice is not using Undeposited Funds.

I have to admit, when I first started using Quickbooks in 2006, I found the idea a bit ludicrous. Initially, I saw no reason why deposits shouldn’t be entered straight into the bank account. I saw Undeposited Funds as a design flaw in Quickbooks, because I thought deposits didn’t need to be a two-step process.

But after thinking about it, I realized I was wrong. Undeposited Funds is actually essential to maintaining accurate customer records in Quickbooks. Here’s why. Deposits will not always consist of single payments from a single customer. Therefore, in order to track a single customer’s payments, you must first enter those payments into the customer record in any accounting program, including Quickbooks. Posting those payments to Undeposited Funds then allows you to group payments from different customers together into the deposit you actually made before posting it to the bank account.

Of course, there’s nothing that <em><strong>requires</strong></em> you to use Undeposited Funds. And maybe at the present time, for some reason, you don’t need to maintain accurate customer payment records in Quickbooks. But that could change in the future. For this reason, and because it is the Quickbooks-recommended best practice, I encourage all my clients to use Undeposited Funds.