How to treat Paypal income?

Basically wondering what’s the best way to treat payments taken in via Paypal. Seems like it’d make sense to transfer to my bank account say once a month, then import bank statement as mentioned here:

Hi, I am in the process of setting up the accounts for a business I am starting for an online tarot course. My site offers a large amount of free information and viewers have asked about a Donate Button. I will be adding a PayPal Donate Button next week which can be accessed by anyone from over 200 countries who use my site. My question is how will I record these donation payments using this software as it appears I need to provide an Invoice for every payment received. Donations will be paid directly into PayPal and I suppose I will get a record of the email address they came from but will not have any other details. Does this mean I will have to create an Invoice for each donation received? However, it is not a sale I have made. Also, I have signed up for WordPress WordAds which works a bit like Adsense. WordPress have placed ads on my site because of the high traffic and I will be paid a share of the revenue each month. Again, this is not a sale and not sure how to record it in ‘money in’ when I have to raise an invoice to match it. Last question is regarding to which category in ‘money out’ to use for Web Hosting, Domain Renewal, Microsoft Office Online and Adobe Suite. Does it go under Computer Equipment or Telephone and Internet. There does not seem to be a category that exactly defines it. Sorry for the lengthy query. Thank You, Vivien

However sales will include VAT, Paypal fees don’t include VAT apparently….Should I ignore Paypal fees and just take the amount sent to my bank account (after paypal fees) as gross income? (and work out a sale price that compensates for the fees)
Or the other option seems to be to include the total amount (inc the bit paypal takes), then expense the fee part but that seems messy and silly. (especially as the amount would inc VAT on most, but not the fee)
Any thoughts?

1 answer

PeteF November 6, 2016

The correct way to treat this is the second way you’ve suggested, which is a bit messier, but more correct. If we look at the accounting entries for all of this, and use an example of your sales as €123 (incl VAT)

  1. Gross income minus VAT as your sales, the VAT on the sales goes straight to the VAT accrual (it’s not part of your sales) until it’s paid. 
    DR Cash/Accounts payable (Balance sheet) €123
    CR Income (Income statement) €100
    CR VAT Accrual (Balance sheet) €23
  2. Paypal fees are an expense
    DR Selling & Distribution expenses (Income statement) €3.57
    CR Cash – PayPal (Balance sheet) €3.57

The handy thing about Bullet is how it looks after the VAT bit for you. You will have to just account for the PayPal fees as a separate expense.

All the best,
– Pete F


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