Royalty Account

The term royalty is used to mean the sum payable by one person called lessee to another person called lessor for using the right by the former vested in the latter. In other ward, it is the periodic payment to the owner of some form of privilege or monopoly for being allowed to use such right or privilege. In simple term it is the amount paid by the user of an asset to the owner of the asset for using the original or indestructible power of the asset. Royalty are usually payable in the following cases or we can divide royalty into the following types. 1. Mining Royalty: The periodical payment made to the owner of the land or quarry or mines by the lessee.It is generally paid on the output. 2. Patent Royalty: The periodical payment made to the owner of a patent right by the user of that patent right. The payment is made on the basis of production or sales. 3. Copyright royalty: The royalty paid by a publisher to the author of a book. Generally it is paid on the basis of print made or sales. The lessee making payment of royalty treat it as an ordinary business expenses & Debit royalty account. Being an ordinary expense, it is closed in each accounting year by transferring to Production or Profit & loss account. Strictly speaking Mining royalty is transferred to Production account and other two royalty is transferred to Profit and loss account. Define Minimum Rent It is also called Dead Rent , Rock Rent or Fixed rent. As the name suggests this is the minimum amount of rent which the lessee is required to pay to lessor whether he has derived any benefit or not from the right or property rented to him by the lesser. The fixation of such rent is in the interest of the landlord bcoz it guarantees him the receipt of a minimum amount in case of low output or sales further it makes the lessee vigilant to increase the production or sales bcoz he has to pay a higher amount then the actual royalty if he fail to increase the out put or sales. The lessee will pay the minimum rent or actual royalty which ever is high. Short Working It is the excess of minimum rent over the actual royalty calculated on the basis of output or sales. Normally shortworking takes place in the gestation period or during the period of strike or lockout when production or sales disturbs due to abnormal working condition. Recoupment of Shortworking It is normally seen that in the first few years the work does not gather the required momentum because of the absorption of tie in the preparation of starting the production due to construction of house, advertising , collecting necessary equipment and machine etc. so shortworking arising in the first few years may not be due to inefficiency of the lessee. Keeping this in view royalty agreement nay contain a clause that the shortworking can be recovered by the lessee in subsequent years when there is an excess of royalty over the minimum rent fixed.( surplus) Thus the right of recovering the excess of payment made in the earlier years is called recoupment of shorting . The right can be Fixed (Restricted) or Floating (unrestricted) Fixed: When the lessor promises to compensate the loss in the first few years commencing from the date of the royalty agreement, the right is said to be restricted or fixed. Any Shortworking arising beyond that period cannot be recouped. Floating: When the lesson promises to compensate the loss of any year in the next (following or subsequent) years then thee right is called as floating . The right is said to be floating bcoz this can be availed of in any ear when Shortworking arises. Shortworking capable of being recouped should be shown in the asset side of the balance sheet and the Shortworking which could not be recouped in the allowed year should be debited to Profit & Loss A/c. The question of Shortworking or its recovery doesnt arise if the royalty agreement doesnt contain a clause minimum rent.

JOURNAL ENTRIES IN THE BOOK OF THE LESSEE If minimum or Dead Rent account is opened When M.R A/c is not opened 1.When M.R.Due Minimum Rent A/c.Dr No To Land lord (Lessor) A/c 2.When Royalty and S.W Transferred to M.R. A/c When royalty due along with S.W. Royalty A/c.Dr Royalty A/cDr Shortworking A/cDr Shortworking A/c..Dr To Minimum Rent A/c To Land lord A/c 3.Payment to Land Lord Payment to Land Lord Land Lord A/c Dr Land Lord A/c.Dr To Bank A/c To Bank A/c (The amount paid is M.R or actual royalty which ever is higher) 4.Transfer of actual royalty to P&L or Prod A/c Transfer of actual royalty to P&L or Prod A/c P & L A/c..Dr P & L A/c..Dr Production A/c..Dr Production A/c..Dr To Royalty A/c(actual) To Royalty A/c 5.At the time of recoupment of Shortworking (Replace with no 3) Land Lord A/cDr To Bank A/c( Amount Paid) Same entry. To Shortworking A/c ( recouped) 6. If there is any unrecouped shortworking Profit and Loss A/c .Dr To Short working A/c Same entry. IN THE BOOK OF LESSOR 1.