PayPal Holds and Reserves: Accounting Treatment for QuickBooks
PayPal holds and reserves create timing differences between when you earn revenue and when you receive cash. Here's how to account for both scenarios in QuickBooks without breaking your reconciliation.
What Are PayPal Holds and Reserves?
Payment Holds
PayPal temporarily holds funds from individual transactions (typically 21 days) until tracking shows delivery or customer doesn't dispute.
Account Reserves
PayPal holds a percentage of all transactions (e.g., 10%) in a reserve for 90+ days to cover potential chargebacks and disputes.
Key difference: Holds apply to specific transactions. Reserves apply to your entire account balance.
Two Accounting Approaches: Cash vs Accrual
Option 1: Cash-Basis Accounting (Simpler)
Record revenue only when funds are released and available in your PayPal balance.
When to use:
- You're a small business using cash-basis tax reporting
- Holds/reserves are infrequent or small amounts
- You don't need to track receivables
Journal entry (when funds release):
Option 2: Accrual Accounting (More Accurate)
Record revenue when earned (sale occurs), even if funds are held. Track held funds as an asset account.
When to use:
- You're using accrual-basis tax reporting (required for $25M+ revenue)
- Holds/reserves are significant (e.g., 10% of monthly sales)
- You need accurate P&L reporting
Journal entry (when sale occurs):
Journal entry (when funds release):
How PayPal CSV Shows Holds and Reserves
PayPal Activity Download CSV has a "Status" column that indicates if funds are held:
| Status Value | Meaning | Accounting Treatment |
|---|---|---|
| Completed | Funds available | Record to PayPal Clearing |
| Pending | Held (awaiting release) | Record to PayPal Funds on Hold |
| Hold | Held (reserve or risk) | Record to PayPal Funds on Hold |
| Denied | Transaction failed | Do not record (no revenue) |
Step-by-Step: Tracking Held Funds in QuickBooks
- 1
Create "PayPal Funds on Hold" Asset Account
In QuickBooks Chart of Accounts, create a new Other Current Asset account called "PayPal Funds on Hold" or "PayPal Reserve".
- 2
Filter PayPal CSV by Status
Separate transactions into two groups:
- Status = "Completed" → Record to PayPal Clearing (available now)
- Status = "Pending" or "Hold" → Record to PayPal Funds on Hold
- 3
Create Journal Entries for Held Transactions
Example: $100 sale with $3 fee (held):
Debit: PayPal Funds on Hold (Asset) $97.00Debit: PayPal Fees Expense $3.00Credit: Revenue $100.00 - 4
Record Release When Funds Become Available
When PayPal releases held funds (Status changes to "Completed"), create transfer journal entry:
Debit: PayPal Clearing $97.00Credit: PayPal Funds on Hold $97.00This moves funds from held to available without double-counting revenue.
Common Mistakes When Accounting for Holds
❌ Mistake 1: Recording Revenue Twice
Recording revenue when held and again when released causes double-counting.
Fix: When funds release, only transfer from Funds on Hold to Clearing. Don't credit Revenue again.
❌ Mistake 2: Ignoring Held Funds in P&L
Using cash-basis when you have significant holds makes your monthly P&L inaccurate (revenue appears lower than actual sales).
Fix: Switch to accrual accounting or add a note to financial statements about held funds.
❌ Mistake 3: Not Reconciling "Funds on Hold" Balance
Your QuickBooks "PayPal Funds on Hold" balance should match PayPal's dashboard "Pending Balance" or "Reserve Balance". If it doesn't, you have missing releases.
Fix: Monthly, compare QBO "Funds on Hold" to PayPal dashboard and record missing releases.
Automatically Handle PayPal Holds and Reserves
TrestleFinance detects PayPal Status column and groups held vs available funds automatically. Get separate journal entries for immediate reconciliation.
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