You should treat PayPal like a bank account in your accounting records, but do not use it as a savings account.
Treat PayPal Like a Bank Account in Your Accounting Records
If you are using your personal PayPal account for business, STOP!
Open up a business bank account and attach a new PayPal business account to it.
When using accounting software, set your business PayPal account up as a bank account. When purchases are made using Paypal and Paypal transferred funds from your business account to fund the purchase, do this:
To record the expense/purchase: Enter the purchase in the PayPal account check register.
To record the transfer of funds to fund the purchase: Enter the transfer of money from the checking account to the PayPal account as a bank transfer.
The result is that you do not enter the PaypPal purchase in your bank account check register, although your bank statement may indicate the vendor paid. When your bank account funds your PayPal account, this is a transfer. The vendor was actually paid by your PayPal account.
When receiving revenue via your PayPal account, do not transfer funds to your bank account then recognize that transfer amount as revenue. Your revenue was the actual amount you charged for your product or service – before PayPal fees.
To record a sale to a customer: Enter a deposit that is split into two lines – 1) recognize revenue at the gross sale price and 2) recognize the PayPal fee as a negative in the deposit entry screen and post to an expense account such as “Merchant Fees.”
Do Not Use PayPal as a Savings Account
PayPal is not a bank and therefore is not insured by the FDIC. The FDIC is a US government corporation operating as an independent agency that provides deposit insurance. It guarantees the safety of a depositor’s account in member banks up to $250K. Should PayPal go out of business or get sued, your funds may not be safe. Be diligent about transferring excess funds in your PayPal account to your bank account.
If you have a steady revenue stream coming into your PayPal account, one suggestion is to obtain a PayPal debit card and use it for business expenses instead of a bank account debit card. This way your PayPal excess funds are used. If there are no funds in your PayPal account, then your bank account will be used to fund the purchase.