Connect to PayPal: A new way to bring PayPal transactions into QuickBooks

Editor’s note: Connect to PayPal is the new PayPal data integration app for QuickBooks®. Built on Intuit’s® staged transactions platform, Connect to PayPal brings in detailed PayPal transaction details into the QuickBooks banking experience.

We asked ProAdvisor® Jonathan Bello, founder of One 8 Solutions, to be part of our beta program, and he provided a number of insights from an accountant’s POV. We’re delighted to share his article below that outlines the new features of Connect to PayPal and how it will benefit your practice and your clients.

If you would like to upgrade your Sync with PayPal or bank feed connection, click here.

Connect to PayPal: An in-depth look from Jonathan Bello

I had a lot of fun being part of the beta test community for Connect to PayPal and have already incorporated it into our regular workflow. I think this is huge leap forward.

If there is one activity that will cause even the best accountant to pull their hair out, it is reconciling PayPal and recording transactions. Let me blow my own horn, I am a very good reconciler. It is probably my favorite accounting activity … well, after reading financials – that’s more fun!

If you have ever looked at an activity report in PayPal, it is enough to make your head spin, and trying figure out what is the current balance so you can reconcile is very difficult.

Well, now that is a thing of the past, and I am going to show the new features/improvements around importing PayPal transactions – now known as Connect to PayPal. 

Using Connect to PayPal

There are a number of ways to access and set up Connect to PayPal. The easiest is by navigating to the banking tab, choosing to add a new account and selecting PayPal. If you have an existing connection through Bank Feeds or the Sync with PayPal app, it will be upgraded in the process.

During the set up, you will go through a series of prompts:

Give Permission to PayPal to access your QuickBooks account.

Then, enter your PayPal login credentials.

Once you are connected, you need to decide how far back you want to pull in PayPal transactions. This is important because you will have to go through a lot of hoops to download it directly from PayPal later on.

Intuit has done a lot of development to make the next part easier. To play it safe, go back 18 months, as it will be easy to exclude transactions you don’t want to import.

Now, it’s time to work with those transactions, and this is a good indication of the types of transactions you will see.

One mistake most users make is they don’t treat PayPal as a bank. Instead, they see PayPal transactions going directly to the funding account (most likely a bank, followed by a credit card) to pay for things and try to account for them there. Another mistake is that sales/income through PayPal sit unrecognized in PayPal until they are transferred to the bank account. 

Then, if there is money sitting in PayPal, the next purchase is deducted from the balance, so when money is transferred to the bank account, it is net of the recent purchase(s), and most likely the net is being coded to PayPal Income, which is a funding source – not to an account/bucket to recognize income such as service and product sales.

One key thing to remember: PayPal is a payment system. It is not a credit card that you pay later. Everything purchased is paid for by either your bank account or credit card. So, let’s look at a small series of transactions that demonstrates this. On the 20th, my client spent or paid two people or businesses $65 & $95.

PayPal immediately withdraws the money from a bank account. In QuickBooks Online (QBO), this is considered a “Transfer” transaction. If you have only one bank account, you can teach QBO to automatically perform this transaction. The great thing about this is that the “transfer” or withdrawal from the bank account will now have a “Matched” item.

The new improved description help avoid this because now it tells you where the funding came from.

• Added Funds from a Credit Card
• Added Funds from a Bank Account

You can manually override each transaction:

But, the best way is to create a rule. This will allow the transaction to go to the Recognized Tab and add them at one time.

The next really big/great improvement is when you sell services or items through PayPal. The old way gave you little discretion, but now you can easily create Sales Receipts from the PayPal feed. In this example, my client is selling tickets for an event.

Let me walk you through this:

You definitely don’t want to click “add” here, but you do want to click on the transaction to expand your choices. Please notice that you will see the gross and net amounts of the transaction (circled in yellow).

Click anywhere on the transaction to expand to see the "Details" and click "Details."

Now, I can change “PayPal sales” to “Ticket Sales” and now be able to associate it to the revenue/cost accounts of my choosing. Please notice that the ‘Deposit to’ category is greyed out. At first, I thought this was a bug, but I discovered very quickly that my fees are being accounted for without me doing anything, and the funding amount will tie in the reconciliation. A way to avoid this is to create the actual PayPal item name in QBO and it should code to that item.

If you click on the Find button, you will see the three transactions associated with this sale.

Then, when you look at the deposit, both the sale and fee are automatically taken care of for you.

You can even go to the Expense transaction and change the account from PayPal fees to Credit card fees if you want to. I’d recommend taking the easy way out and just make PayPal Fees a subaccount of Credit Card Fees.

The rest of the items in the PayPal should be easy to handle, especially now with the improved descriptions.

If the sales receipt was created in QBO, you want to make sure the ‘Deposit to’ is ‘Undeposited Funds.’ This way, when you match the transaction, the feed will create the same deposit transaction again.

When the feed matches PayPal items to QBO Items, it will be indicated by showing the QBO income account. In the example below, “Services” is the QBO account from the QBO item and PayPal Sales is the default account when the Bank Feed doesn’t know what account to associate it to. Another nice feature in the feed is when you hover over the deposit amount, it will show sales-fees=net amount.

This screenshot is an example of a sales receipt that was added manually to QBO and then matched to the PayPal Feed. Again, the hover shows sales minus fees equals net amount.

Now comes the fun part … reconciling. If it wasn’t difficult enough to get the transactions into QBO, reconciling is nearly impossible. First, it’s tough to figure out where to get your numbers from! If you go to the PayPal website and look at recent activity, it looks great and easy to understand, but it doesn’t match up with reality because of the fees and funding. Here is an inkling of the difficulty: the recent activity gives you the gross amounts, not the funded amount.

Funded Amount in PayPal:

Unfortunately, the only way to see true activity is to download an activity report and open it up in Excel. This example is filtered for the same day. Notice the highlighted column – that is the funding amount. (I cut and moved the balance column.)

There are so many transaction types in PayPal; this example is screen shot of my activity spreadsheet:

When I teach reconciling in my classes, I generally recommend tying the deposits out first. This can be done by filtering for transactions that increase the balance such as:

• Express Check out Payment – Sale through PayPal
• eBay Auction Payment – eBay Sale
• General Credit Card Deposit – purchase through PayPal on a credit card
• Bank Deposit to PP Account (Obsolete) – Purchase through PayPal on a Debit card

In my testing, I was able to tie out my net PayPal sales in the reconciliation to my spreadsheet.

This is just the beginning of the twists and turns that still exist with PayPal, but with the new feeds untangling this mess, has gotten a lot easier. Some things can throw this off. Be careful to make sure that if you want to change the item in the sales receipt, you complete it; otherwise, you have to unmatched the deposit to go back and edit the sales receipt and then rematch it in the feeds.

Refunds should be done as Refund Receipts, and you either need to net the fees returned in it or have them as separate deposits. If you net them, they won’t match the downloaded transaction.

I had to add the $1.45 as a deposit transaction, and cleared them after I tied out the Sales & Funding transactions.

The development team at Intuit has been working really hard at these improvements and I expect to see additional minor improvements to continue. Overall, I highly recommend using the much-improved feed to accurately record transaction activity through PayPal.