active_merchant.rb

# config/initializer/active_merchant.rb

if Rails.env.production? 
  PAYPAL_ACCOUNT = '[email protected]'
else
  PAYPAL_ACCOUNT = '[email protected]'
  ActiveMerchant::Billing::Base.mode = :test
end

new.html.erb

<!-- app/views/payment/new.html.erb -->

<% payment_service_for @order.id, PAYPAL_ACCOUNT,
        :amount => @order.price, :currency => 'EUR',
        :service => :paypal do |service|

    service.customer :first_name => current_user.name,
        :last_name => current_user.surname,
        :email => current_user.email

    service.item_name @order.items_summary

    # PayPal will POST a callback here when the payment is done
    service.notify_url notifications_url(@order)
    # PayPal will take your user here with a POST after he pays
    service.return_url paypal_return_notifications_url(@order)
    # PayPal will redirect your user here if he cancels the payment
    service.cancel_return_url paypal_cancel_notifications_url(@order) %>

    <%= submit_tag 'Pay this order' %>
<% end %>

notifications_controller.rb

# app/controllers/notifications_controller.rb

class NotificationsController < ApplicationController
  include ActiveMerchant::Billing::Integrations
  protect_from_forgery :except => [:create, :paypal_return] 

  # This action is for when the buyer returns to your site from PayPal
  def paypal_return
    flash[:notice] = "Thanks for buying this!"
    redirect_to root_path
  end

  # This action is for when the buyer cancels
  def paypal_cancel
    flash[:notice] = "We're sorry you didn't buy :("
    redirect_to root_path
  end

  # This is what will receive the IPN from PayPal
  def create
    # You maybe want to log this notification
    notify = Paypal::Notification.new request.raw_post
    @order = Order.unpaid.find(notify.item_id)

    if notify.acknowledge
      # Make sure you received the expected payment!
      if notify.complete? and @order.price == BigDecimal.new( params[:mc_gross] )
        # All your bussiness logic goes here
        @order.update_attributes(:paid => true)
        render :nothing => true
      end
    rescue
      #Make sure you log the exceptions you have.
    end
  end
end