PayPal Holds and Reserves: QuickBooks Accounting Guide
Complete guide to accounting for PayPal payment holds, rolling reserves, and account limitations in QuickBooks with proper journal entries.
Understanding PayPal Holds and Reserves
PayPal uses several mechanisms to protect buyers and manage risk, which can temporarily restrict your access to funds:
Payment Holds
Duration: Up to 21 days
Trigger: New sellers, disputes, risky transactions
Release: After 21 days, tracking, or positive feedback
Rolling Reserves
Duration: 90+ days (rolling)
Trigger: High-risk business, high volume
Release: Automatic after hold period
Account Limitations
Duration: Until resolved
Trigger: Policy violations, verification issues
Release: After providing required info
Key Accounting Principle
All three types of restrictions affect cash availability, but they don't change when revenue is earned.
Under accrual accounting, you recognize revenue when the sale occurs, regardless of when cash becomes available. The accounting challenge is properly tracking funds that are owned by you but not yet accessible.
This guide will show you how to properly account for each type of restriction in QuickBooks, maintaining accurate revenue recognition while tracking cash flow constraints.
Payment Holds (21-Day Hold)
What Are Payment Holds?
PayPal payment holds are temporary restrictions placed on specific transactions. The money is in your PayPal account, but you cannot transfer it to your bank until the hold is released.
Common Reasons for Payment Holds
Seller-Related:
- • New seller (less than 90 days)
- • Haven't sold in a while (180+ days inactive)
- • Sudden spike in sales volume
- • Higher than average refund rate
- • Selling in high-risk categories
Transaction-Related:
- • Customer files dispute or claim
- • Unusual transaction pattern
- • High-value sale (relative to history)
- • International transaction
- • Buyer's payment method flagged
How Payment Holds Work
Sale Occurs
Customer pays $125.00. PayPal immediately deducts $3.93 fee. Net $121.07 is placed on hold (shows in "Pending" balance, not "Available" balance).
Hold Period
Funds remain unavailable for up to 21 days. You cannot withdraw or use them. They're visible in your PayPal account but locked.
Release (Early or Automatic)
Hold releases early if: (1) You add tracking that shows "delivered", (2) Buyer leaves positive feedback, (3) 21 days pass with no issues. Funds move to "Available" balance.
QuickBooks Accounting for Payment Holds
Chart of Accounts Setup
Create a separate asset account to track held funds:
PayPal Funds on Hold
Account Type: Other Current Asset
Purpose: Track revenue earned but temporarily restricted by PayPal
Entry 1: When Sale Occurs (Placed on Hold)
Date: January 15, 2025 | $125 sale with $3.93 fee, funds on hold
| Account | Debit | Credit |
|---|---|---|
| PayPal Funds on Hold (Asset) | $121.07 | — |
| Payment Processing Fees (Expense) | $3.93 | — |
| Sales Revenue (Income) | — | $125.00 |
Note: Revenue recognized immediately (accrual accounting), but cash goes to "on hold" account, not clearing account.
Entry 2: When Hold is Released
Date: January 22, 2025 | Tracking confirmed, hold released after 7 days
| Account | Debit | Credit |
|---|---|---|
| PayPal Clearing (Asset) | $121.07 | — |
| PayPal Funds on Hold (Asset) | — | $121.07 |
Result: Asset transfer from "on hold" to "available". No P&L impact (revenue already recognized).
Rolling Reserves
What Are Rolling Reserves?
A rolling reserve is when PayPal automatically holds a percentage of each transaction (typically 10-30%) for a set period (usually 90 days) as protection against future chargebacks and refunds.
Example: 10% Rolling Reserve for 90 Days
Today (Jan 15): You make a $1,000 sale
- • Gross: $1,000.00
- • Fee: -$29.30
- • Reserve (10%): -$100.00
- • Available now: $870.70
April 15 (90 days later): Reserve released
- • $100.00 moves from reserve to available balance
This happens every day on a rolling basis. Today's reserve is released in 90 days. Tomorrow's reserve is released in 91 days from today.
Who Gets Rolling Reserves?
Typical Scenarios:
High-Risk Industries
Travel, tickets, electronics, digital goods, adult content, multi-level marketing
High Sales Volume
Merchants processing $10k+/month, especially with rapid growth
History of Chargebacks
High dispute rates, even if resolved in your favor
Preorders / Crowdfunding
Selling products with delayed fulfillment (30+ days)
QuickBooks Accounting for Rolling Reserves
Chart of Accounts Setup
Create a separate asset account for reserves:
PayPal Rolling Reserve
Account Type: Other Current Asset
Purpose: Track funds held by PayPal as rolling reserve (released on schedule)
Entry 1: When Sale Occurs (Reserve Applied)
Date: January 15, 2025 | $1,000 sale, $29.30 fee, 10% reserve ($100)
| Account | Debit | Credit |
|---|---|---|
| PayPal Clearing (Asset) | $870.70 | — |
| PayPal Rolling Reserve (Asset) | $100.00 | — |
| Payment Processing Fees (Expense) | $29.30 | — |
| Sales Revenue (Income) | — | $1,000.00 |
Split: $870.70 available now, $100 in reserve for 90 days. Revenue recognized in full.
Entry 2: When Reserve is Released (90 Days Later)
Date: April 15, 2025 | $100 reserve released after 90 days
| Account | Debit | Credit |
|---|---|---|
| PayPal Clearing (Asset) | $100.00 | — |
| PayPal Rolling Reserve (Asset) | — | $100.00 |
Result: Asset transfer from reserve to available. No P&L impact.
Managing Rolling Reserve Cash Flow
Cash Flow Challenge
Rolling reserves create a cash flow gap. For the first 90 days under a new reserve, you're building up the reserve balance:
Days 1-90: Cash outflow (building reserve)
You're earning $1,000 but only receiving $870-900
Day 91+: Steady state
Today's sale adds $100 to reserve, but Day 0's $100 is released
Planning tip: If you have 10% reserve on $10k/month sales for 90 days, you'll have ~$3,000 tied up in reserve at steady state.
Account Limitations and Frozen Funds
What Are Account Limitations?
Account limitations are more severe restrictions where PayPal may freeze your entire account balance (not just specific payments) until you resolve an issue.
⚠️ Common Causes of Account Limitations
1. Verification Required: Identity, bank, or address verification not completed
2. Policy Violations: Selling prohibited items, violating seller protection requirements
3. High Dispute Rate: Excessive chargebacks or buyer complaints
4. Suspicious Activity: Unusual login locations, sudden transaction changes
5. Negative Balance: Account overdraft due to chargebacks or forced refunds
Types of Limitations
Withdrawal Limitation
Cannot withdraw funds, but can still receive payments
Duration: Until verification completed
Full Account Limitation
Cannot send, receive, or withdraw funds
Duration: Until issue resolved
Permanent Suspension
Account closed, funds held 180 days
Duration: 180 days, then released
QuickBooks Accounting for Frozen Funds
Chart of Accounts Setup
Create account for limited/frozen funds:
PayPal Funds Frozen/Limited
Account Type: Other Current Asset
Purpose: Track funds inaccessible due to account limitations
Entry: When Account is Limited
Date: February 1, 2025 | Account limited, $5,000 frozen
| Account | Debit | Credit |
|---|---|---|
| PayPal Funds Frozen/Limited (Asset) | $5,000.00 | — |
| PayPal Clearing (Asset) | — | $5,000.00 |
Purpose: Segregates frozen funds from available balance for accurate cash flow reporting.
QuickBooks Accounting Treatment Summary
Recommended Chart of Accounts Structure
| Account Name | Type | Purpose |
|---|---|---|
| PayPal Clearing | Current Asset | Available balance (can withdraw) |
| PayPal Funds on Hold | Current Asset | 21-day payment holds |
| PayPal Rolling Reserve | Current Asset | 90-day rolling reserve |
| PayPal Funds Frozen | Current Asset | Account limitation holds |
| Sales Revenue | Income | Gross sales (recognized when earned) |
| Payment Processing Fees | Expense | PayPal processing fees |
Balance Sheet View
Example Balance Sheet (PayPal Section)
Current Assets:
This gives accurate view of: (1) Cash available now, (2) Cash releasing soon, (3) Cash restricted long-term
Release and Recovery Scenarios
Early Hold Release (Tracking Confirmed)
Best Case: 3-Day Release
When you add tracking number that shows "delivered":
- • Day 1: Customer pays, funds on hold
- • Day 2: Ship with tracking, add to PayPal
- • Day 3: Tracking shows "delivered"
- • Day 4: Funds released (available for withdrawal)
Accounting: Same as 21-day hold, just faster timeline for transfer from "on hold" to "clearing".
Reserve Reduction or Removal
Scenario: Reserve Reduced from 10% to 5%
After 6 months of good performance, PayPal reduces your reserve:
Before: $1,000 sale → $100 in reserve, $870 available
After: $1,000 sale → $50 in reserve, $920 available
Existing reserves continue releasing on original schedule. New sales use lower rate.
Account Limitation Resolved
Entry: When Limitation is Lifted
Date: March 1, 2025 | Verification completed, $5,000 unfrozen
| Account | Debit | Credit |
|---|---|---|
| PayPal Clearing (Asset) | $5,000.00 | — |
| PayPal Funds Frozen/Limited (Asset) | — | $5,000.00 |
Result: Funds move back to available balance. Can now withdraw.
Automate PayPal Hold Tracking
TrestleFinance can help identify and categorize holds, reserves, and limitations in your PayPal exports.
Try TrestleFinance FreeFrequently Asked Questions
What is a PayPal payment hold and why does it happen?
A PayPal payment hold is when PayPal temporarily restricts access to funds from a sale for up to 21 days. This happens for new sellers, high-risk categories, sudden sales spikes, or customer disputes. The money is in your PayPal account but unavailable for withdrawal. Holds are released after 21 days, tracking confirmation, or positive buyer feedback.
How do I record a PayPal payment hold in QuickBooks?
Use a separate "PayPal Funds on Hold" asset account. When a sale is placed on hold: DR PayPal Funds on Hold (Asset), DR Processing Fees (Expense), CR Sales Revenue (Income). When released: DR PayPal Clearing (Asset), CR PayPal Funds on Hold (Asset). This keeps held funds separate from available balance and shows accurate cash flow.
What is a PayPal rolling reserve?
A rolling reserve is when PayPal holds a percentage (typically 10-30%) of each transaction for a set period (usually 90 days) as protection against chargebacks and refunds. Unlike payment holds, reserves are automatically applied to all transactions and released on a rolling schedule. For example, 10% of today's sales are released 90 days from today.
How is a rolling reserve different from a payment hold?
Payment holds are temporary restrictions on specific transactions (released after 21 days or tracking). Rolling reserves are ongoing percentage holds applied to ALL transactions (released after 90+ days on a rolling basis). Holds are typically for new/risky sellers. Reserves are for high-volume or high-risk businesses. Both restrict access to your money but work differently.
Can I still recognize revenue for payments that are on hold?
Yes. Revenue should be recognized when earned (when the sale occurs), not when cash is received. A PayPal hold doesn't change when revenue is earned - it only affects cash availability. Record the full gross amount as revenue, record the fee as expense, and place the net in "PayPal Funds on Hold" instead of "PayPal Clearing". This follows accrual accounting principles.
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