How to link PayPal to QuickBooks Online (Part 1)

Joe was experiencing a major problem in QuickBooks Online. He was using PayPal to make online payments to his vendors. However, he didn’t know to link his PayPal account with QBO or how record online payments made with his PayPal account. Joe just didn’t know how PayPal worked, and he was frustrated. If you’re using PayPal and QuickBooks Online then this blog post is for you. I’ll show you how to link PayPal to QuickBooks Online. And then, I’ll show you how to how to enter payments made with PayPal in QuickBooks Online correctly.

But first, let’s get a better understanding of how PayPal works.

How PayPal Works

PayPal facilitates online payments. There are 4 primary ways to use PayPal:

1. Make payments to vendors using a credit card as the primary PayPal account.
2. Make payments to vendors using a checking account as the primary PayPal account.
3. Use PayPal to receive customer payments.
4. Use PayPal to receive customer payments and make payments to vendors.

In this blog post, I’ll go over the first two ways to use PayPal.

When you’re using PayPal to make payments to vendors using either a credit card or a checking account, then PayPal works like another bank account. PayPal is used to pay vendors with money transferred-in from a checking (operating) account or a credit card account. When you go to make an online purchase: These funds are first transferred from your credit card or checking (operating) account to your PayPal account. Afterwards, these funds are then transferred from your PayPal account to the vendor.

Here’s a diagram, showing you the movement of money through PayPal.

When you set up your PayPal account for the first time, you have the option of linking your credit card or your checking account to PayPal as the primary payment account. PayPal will use that primary payment account to withdraw money in order to pay vendors. Depending on your selection, PayPal expenses will be recorded differently in QBO.

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PayPal expenses will be recorded differently in QBO depending on which account you link it to.
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Link PayPal to QuickBooks Online – Method #1: Credit Card

If you decide to use a credit card as the primary payment account, then I have good news; you don’t need to link PayPal with QuickBooks Online. When a credit card is your PayPal’s primary payment account, your PayPal transactions are pulled directly into your credit card’s bank feeds in QBO.

For example: If you made a $150 purchase from Lara’s Lamination with your PayPal account, the payment will show up in your credit card’s bank feeds. All you need to do is add the expense to QBO.

Link PayPal to QuickBooks Online – Method #2: Checking Account

If you decide to use your checking (operating) account as the primary payment account, link PayPal with QuickBooks Online.

Follow these steps to link PayPal with QuickBooks Online.

Connect your PayPal account to QuickBooks Online

First, make sure that your PayPal account is set up in the QBO Chart of Accounts.

Next, connect your PayPal account to QBO. In the online banking section, select Add Account.

Next, select PayPal.

1. You will be asked; How do you use PayPal most often?
2. Since you’re using PayPal to pay for products and services from vendors, select Set up Bank Feeds.

Complete the remaining required information until your PayPal account is connected to QBO.

Working with your PayPal account in QuickBooks Online

Once the PayPal account is connected to QBO, you will see “money-in” and “money-out” transactions in the Banking section.

Remember, if you’re using PayPal to pay vendors, then PayPal will function like a clearing account.

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If you’re using PayPal to pay vendors, then PayPal will function like a clearing account.
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For example:

1. If you buy office supplies on Amazon for $30.00, you will see a money-out (expense) transaction for $30.00.
2. You should also see a money-in transaction for $30.00. This is the money which was transferred from the checking (operating) account, so that you can have funds to pay the vendor with the PayPal account.

In the next section, I’m going to show you the Three Step Method for correctly recording PayPal expenses.

Categorize PayPal expenses in the Banking section.

Go through all of the money-out transactions in the spent column and assign expense categories.

Let’s work through an example.

Select the PayPal account in the Banking section

In the PayPal bank feed:

1. Select the $30 money-out transaction for Amazon, dated 04/01/2018.
2. Assign the appropriate vendor.
3. Assign the category.
4. Select add.

Repeat steps 1 –4 for the remaining money-out transactions in the PayPal bank feed.

For now, DO NOT ADD any money-in transactions (in the received column). You will work on this later.

Record transfers from the Checking account to the PayPal account

Now, go to the checking (operating) account in the Banking section.

Select the checking (operating) in the Banking section and look for money-out transactions with the same date and amount as the PayPal expenses.

To illustrate how this should be done, let’s continue with our example:

Remember how the $30 expense transaction for Amazon was added to PayPal? Well, now there is also a $30 expense transaction, also dated 04/01/2018. But this time, it’s in checking (operating) account bank feeds window.

If you select the $30 expense transaction, you will see the following memo/description: PAYPAL INS XFER AMAZON

This means that this transaction is actually a transfer from the checking (operating) account to the PayPal account. So, now, a transfer must be recorded.

To record a transfer:

1. Select the $30 money-out transaction.
2. Check the circle next to Transfer.
3. Select PayPal as the account you’re transferring to.
4. And then, select Transfer.

Repeat steps 1 –4 for any other remaining transfers to PayPal.

Match the transfers from the Checking account to the PayPal account

By now, you should have recorded all the transfers from the checking (operating) account to the PayPal account. But remember how there are still money in transactions in the PayPal bank feed? (The ones I told you not to touch). Well, now these money-in transactions must be matched.

If you open the PayPal bank feed window, you should see a Match next to the money-in transactions.

Simply, go through each transaction, and select Match.

And there you go. That’s how to record a PayPal expense in QuickBooks Online.

Easy, right?

Don’t forget to reconcile

Finally, reconcile your PayPal account as you would with a regular bank account. You can retrieve your PayPal statements from your online PayPal account. If you’re using PayPal only for online purchases, the ending balance should always be zero.

Here’s a video instruction, showing you how to reconcile a bank account.

Closing

I’ve just shown you how to link PayPal to QuickBooks Online. I’ve also shown you how to enter payments made with PayPal in QuickBooks Online correctly. But remember, a lot of business owners use PayPal for much more than just making payments to vendors. Some use PayPal to receive payments from customers. Others use PayPal to pay vendors AND receive payment from customers. Each of these situations will be featured in future blog posts about PayPal. Stay tuned.

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