In this article we’ll take a look at the benefits and draw backs to using PayPal for business.
There are two aspects to PayPal that must be weighed out individually, as PayPal provides for making payments to vendors as well as taking payments from clients.
Receiving Client Payments with PayPal
When looking at the big bookkeeping picture, using PayPal to collect payments doesn’t really present and large hurdles or complications. It’s just another avenue of income to be parsed, categorized and recorded.
As a bookkeeper and a business owner, it is my opinion that using PayPal to take client payments is both easy for me and convenient for my clients. Clients can initiate a payment or I can send them an invoice by which they can make their payment. I find the invoicing feature on the app to be relatively user friendly and easy to navigate. Additionally, the processing fees are pretty in line with those of the average credit card processor. Of course, these fees can be also be passed on to the client.
From the client’s perspective, they don’t even need a PayPal account to pay a PayPal invoice. They get the email and just enter their card info, easy peasy.
The only time using PayPal to collect payments can get hairy is when the volume is sufficiently high as to warrant the downloading of spreadsheet files to collate and categorize the data. But even so, this would be true of most income channels.
Making Vendor Payments with PayPal
Using PayPal to make vendor payments is whole other ball of wax. For one, if there aren’t sufficient funds inside the PayPal account to cover an expense, it is debited from a credit or debit card on file. This means that PayPal will now debit your bank or credit card account to cover the expense. There are a number of reasons this can become problematic.
1. The name of the vendor is not always present on the bank statement, many times it will just come through as PayPal, which makes categorization tough or even impossible.
2. If there are funds in PayPal but not enough to cover the expense, PayPal will debit the difference from a card on file. This means that a partial charge will show up on the bank statement, which can make it even more difficult to identify, especially if the vendor’s name isn’t clear.
3. When using PayPal for both collecting client payments and paying vendor expenses, the two can often get tangled up. For example: A client pays in $500 and then a Verizon expense of $200 comes out, this will leave $300 in PayPal, which may be transferred out of PayPal and into the bank account, showing an income amount of $300, instead of the $500 that the client paid. As long as someone is in control of everything, this can be kept straight, but if a business employs after-the-fact bookkeeping to just reconcile bank and credit card statements the records would not be accurate. As we all know inaccurate records can be quite costly in the even of an IRS audit, especially after penalties and interest are added.
4. If the PayPal account is not being accounted for, expenses will get missed. This means tax deductions will fall through the cracks. If the PayPal account is being accounted for, many transactions will need to be entered twice. In the event that a business uses PayPal and has this as a bank account on the chart of accounts, a bank transfer must be employed for each transaction. For example: PayPal is used to pay Office Depot for $125.36. PayPal doesn’t have any funds so debits the bank card on file. Now the PayPal account shows a payment out of $125.36 and the bank statement also shows a payment out of $125.36. These can’t both be recorded as office supplies to Office Max, as Office Max only got paid once. So now we need to create a transfer from the bank account to the PayPal account for $125.36 to put the funds in PayPal to cover the charge. The transfer is reconciled in the bank account as the Office Max purchase. If this sounds confusing to you, you’re NOT alone! It’s confusing to me and I’ve been doing this for years.
If you want my advice, using PayPal to take client payments can work out quite well. However, for business expenses it causes unnecessary complications which are likely to cost you more time and money in the long run.
About the Author
I have been doing bookkeeping for about 20 years and concurrently held a position as the head of HR for a small management firm for 14 of those years.
Currently, I am an owner of Peggy’s Bookkeeping Service with my partner and mother, Peggy. Peggy’s Bookkeeping is a small, family-owned bookkeeping service based in Clearwater, FL. You can visit our website at www.peggysbookkeeping.com.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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