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PayPal actually works several ways for payments. First, you can deposit money into a PayPal account, and pay for a transaction with the money in the PayPal account. Second, you can link your PayPal account to a bank account, and effectively give PayPal authorization to withdraw the money from the bank account whenever you make a purchase. Third, you can link your PayPal account to a credit card, in which case a charge is made against the card by PayPal when you make a purchase.
On the receiving end, the money you receive for merchandise sold gets deposited into your PayPal account. There are also a couple of different options there. If you use PayPal infrequently, as in an occasional Ebay sale, you can pay a fee and PayPal will mail you a check for an amount you want from your account. Alternatively, you can link your PayPal account to a bank account (as Ed has done) and withdraw money from your PayPal account to the bank account. At that point you can withdraw the money from the bank account, because as was noted above, PayPal could potentially take that money back if there is a dispute.
Note that there are different "levels" of PayPal accounts, the simplest of which is free, and the more sophisticated ones I believe there is an annual fee (from what I remember, it's been several years since I set my account up, things may have changed.) Anyway, with some of the basic accounts there is a limit to how much you can withdraw from your PayPal account each month (around $500 IIRC). So, if you are selling $1200 knives, you have to withdraw amounts over 3 months to get your money out. If you move up to a business account (which has higher fees) then I think the amount you may withdraw each month goes up.
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