Setting up Paypal transactions
For directions on how to set up a Paypal account as a bank account in Xero, refer to Xero's instructions.
Once set up, Paypal transactions can be reconciled against orders from your store:
One line will match the order grand total, and the second line is the Paypal fee. Reconcile these both manually in Xero (as you would with a standard bank or credit card transaction reconciliation).