From time to time, we work with a business that has not set up their PayPal bank balances as assets on their balance sheet.
These businesses choose to recognize PayPal funds in their business when they are transferred from PayPal to a linked bank account.
Although this process may be considered efficient to save time and effort, it is very important to recognize each PayPal bank account as an asset on balance sheet.
1. Cash versus Accrual
All businesses, no matter where in the world they are registered, have compliance reporting requirements. One example of this reporting is for sales and income tax.
Depending on the region on which your business is registered these tax returns may require the report to be lodged on an accrual basis.
Consider the following example:
Computers R Us, is a business registered in a jurisdiction where sales tax must be reported on an accrual basis (accrual means the date on which the sale was made triggers the sales tax liability).
A business receives a deposit net of fees of $1,000 to their PayPal account on 29 November 2024. This deposit is from Shopify store, and represents goods sold on this day for $1,030. Sales tax of $90.91 (or 10%) was collected by the store, and a $30 fee was charged by PayPal.
The business transferred the funds from PayPal to their linked bank account on 3 January 2025.
The business does not account for PayPal in their accounting ledger. When the Sales tax return was lodged for the quarter ended 31 December 2024, the $1,030 sale was not reported. This sale will be reported in the quarter ended 31 March 2025.
The store has incorrectly reported the sale in the wrong quarter (March 2025, instead of December 2024).
2. Accounting for all Transaction Types
Following on from the above example, the business will not have visibility over the gross sale of $1,030 or the merchant fee charged by PayPal of $30.
In addition, the business may use PayPal for other purposes, for example paying suppliers for goods and services or taking out a loan with PayPal credit. None of these transactions would be reflected in the accounting ledger, if PayPal is not set up as an asset and reconciled on a regular basis.
3. Balances held in Foreign Currencies
Many businesses may account properly for the PayPal account in the home currency, but choose not to account for the other PayPal currencies assuming that if all funds are transferred to the home currency on a regular basis, this step is not needed.
Consider the following example:
Computers R Us is located in Canada. They receive $1,500 USD to their US PayPal wallet that is set up within their PayPal account.
They immediately transfer the $1,500 US to their Canadian PayPal account, which converts to $2,205 Canadian (which is an Fx rate of 1.47 CAD to USD).
Two accounting events have occurred here. The first is a sale, through Shopify and a receipt of funds of $1,500 USD. The second transaction is a transfer from USD to CAD. These two transactions should be recorded separately as they represent different business activities.
4. Holding a balance in PayPal bank accounts
Not all businesses transfer funds from PayPal to their linked bank account immediately.
Many businesses deliberately leave balances in foreign currency PayPal accounts to pay back out of these to suppliers to save on currency conversion costs.
In addition, businesses may leave funds in PayPal to accumulate there as their preferred bank account.
These assets must be recognized as part of the business, in the same time period they are realized.