The easiest way is to sign up for a Paypal account (to get to their site, type "paypal" into the searchbox at the top of the page, tick the "Web" radio button and click "Search"). Sign into your Paypal account. Once you are signed in, you will see a Paypal Merchant Tool tab. Click that and you will get to a page, on the right side of which you will see a section titled "Key Features".

Paypal merchant tools key features

Click on "Donations" and you will get to a page where you have various fields to fill in. One of them is "Donation Name/Services". I typed "This is for demonstration purpose only ...." thinking it will be added to the top of the button, but it appeared serve no purpose because I left the other fields empty (except for my country which is already selected in the drop-down menu), left the choice of the default "donation" button Paypal make a donation button ticked, click "Create Button Now" at the bottom of the page. The HTML was generated. I just copied the HTML, got to the LAYOUT of the relevant blog, click Add a Page Element, chose HTML/Javascript, paste the HTML into the box and click "Save to Blog". That Page Element was added to the top of the left sidebar section. I wanted it at the bottom so I dragged it down, then click "Save" at the top of the LAYOUT.

I click "View Blog" and didn't "This is for demonstration..." so I had to edit the Page Element and added that to the Title. I will be writing to Paypal for the purpose of those fields and will update this post when I get a response.

If you want a different button from the Paypal make a donation button, you will have to create your own button, perhaps using one of those free button generator sites (use the searchbox at the top of the page. Tick the "Web" radio button). Upload it to the web using either Getting New Blogger to host a picture for the profile photo, sidebar, Header, etc. (click BACK button to get back to this page) or use Photobucket. Get the URL, paste that into the field for the Button Image URL and tick the radio button.