ROYALTY ACCOUNTS 1

INTRODUCTION:

Royalty is an amount payable for utilising the benefits of certain rights vested with some other
person. For example Landlord possess the right over the mine in his land, the author of the
book possesses right over his book. Some one have their knowledge, money but don’t have
land, properties or assets, so they have to hire the properties for rent. The person who is taking
the land as lease is called lessee and the land lords are called as lessor.

The rent which is paid to property owner for using his right over property as periodically
consideration is called royalty. These rent are determined on the basis of production and sales
of the product. It is expenditure to lessee and Income to the Lessor.

MEANING:

Royalty is periodical sum based on the output payable by the lessee to the lessor for
having utilise the right of the lessor. The owner of the asset is known as Lessor and the person
who makes the payment to the owner of the asset is known as Lessee.

TYPES OF ROYALTIES

There are following types of Royalties –

 Copyright − Copyright provides a legal right to the author (of his book/s), the
photographer (on his photographs), or any such kind of intellectual works. Copyright
royalty is payable by the publisher (lessee) of a book to the author (lessor) of that book
or to the photographer, based on the sale made by the publisher.
 Mining Royalty − Lessee of a mine or quarry pays royalty to lessor of the mine or
quarry, which is generally based on the output basis.

 Patent Royalty − Patent royalty is paid by the lessee to lessor on the basis of output or
production of the respective goods. Patent royalty is paid by the user to the owner based
on the number of items produced.

BASIS OF ROYALTY

MEGHA BHOOTE, ASSISTANT PROFESSOR, DEPT. OF COMMERCE, GFGC SAGAR 1

ROYALTY ACCOUNTS 2

In case of the patent, publisher of the book pays royalty to the author of the book on the basis
of number of books sold. So, holder of patent gets royalty on the basis of output and the mine
owner gets royalty on the basis of production.

IMPORTANT TERMS USED IN ROYALTY

Following are the important terms, which are used in Royalty agreements −

Royalty

A periodic payment, which may be based on a sale or output is called Royalty. Royalty is
payable by the lessee of a mine to the lessor, by publisher of the book to the author of the book,
by the manufacturer to the patentee, etc.

Landlord

Landlords are the persons who have the legal rights on mine or quarry or patent right or
copybook rights.

Tenet

An Author or publisher; lessee or patentor who takes out rights (usually commercial or personal
rights) from the owner on lease against the consideration is called tenet..

Minimum Rent

According to the lease agreement, minimum rent, fixed rent, or dead rent is a type of guarantee
made by the lessee to the lessor, in case of shortage of output or production or sale. It is the
amount below which the lessor never accept the rent from the lessee. It means, lessor will
receive a minimum fix rent irrespective of the reason/s of the shortage of production and sales

Payment of royalty will be minimum rent or actual royalty, whichever is higher for example −

M/s Hyderabad publication printed a book on Java on the minimum rent of Rs. 10,00,000/- per
annum royalty being payable @ Rs. 20 per book sold. In the first year of publication,
Hyderabad publication sold 75,000 copy of the books and in the second year, number of sold
books fell down to 45,000 only. Amount of royalty will be payable as under −

Minimum Rent Royalty Payable

Ist Year
10,00,000 Rs. 15,00,000
75,000 Books X Rs. 20 per book = Rs. 1,5,00,000

IInd Year
10,00,000 Rs. 10,00,000
45,000 Books X Rs. 20 per book = Rs. 9,00,000

Shortworkings

MEGHA BHOOTE, ASSISTANT PROFESSOR, DEPT. OF COMMERCE, GFGC SAGAR 2

 ROYALTY ACCOUNTS 3

Difference of minimum rent and actual royalty is known as shortworkings where payment of
Royalty is payable on the basis of minimum rent due to shortage in the production or sale. For
example, if calculated royalty is Rs. 900,000/- as per sale of books based on the above example,
but royalty payable is Rs. 1000,000 as per minimum rent, shortworking will be Rs. 100,000
(Rs. 1,000,000 – Rs. 9,00,000).

Right of Recouping

It may contain in the royalty agreement that excess of minimum rent paid over the actual royalty
(i.e. shortworkings), may be recoverable in the subsequent years. So, when the royalty is in
excess of the minimum rent is called the right of recoupment (of shortworkings).

Right of recoupment will be decided for the fixed period or for the floating period. When the
right of recoupment is fixed for the certain starting years from the date of royalty agreement, it
is said to be fixed or restricted. On the other hand, when the lessee is eligible to recoup the
shortworkings in next 2 or 3 years from the year of its commencement, it is said to be floating.

Shortworking will be shown on the asset side of Balance sheet up to allowable year of
recouping after that it will be transferred to profit & loss account (after expiry of allowable
period).

Difference between Rent and Royalty

Sl. Point of Rent Royalty
No Differences
1 Type of Asset Rent is the consideration Royalty is the consideration payable
payable for the use of for the use of Tangible assets &
Tangible assets Intangible assets
2 Basis of Rent is calculated on the Royalty is calculated on the basis of
Calculation basis of period output or sales
3 Variability The amount of rent is fixed The amount of royalty variable as
per the sales or output
4 Minimum There is no concept of Royalty normally contains a clause
Rent minimum rent to pay minimum rent
5 Parties Parties are known as tenant Parties are known as Lessee and
and landlord Lessor

Analytical table for Royalty Payable:

Year Output Royalty Minimum Short Surplus Recouped Recouped Irrecoverable Surplus Amount
(Tons) Rent Working During in next payable
the year year to
Lessor

Note: Amount payable to Lessor

1. When Minimum rent is more than the Royalty Minimum Rent
2. Royalty is more than the minimum rent Royalty
3. Royalty is more and short working recovered Royalty minus Short
working recovered
4. Royalty is more and there is surplus Royalty – Short working recovered

PROBLEMS ON ROYALTY PAYABLE:

MEGHA BHOOTE, ASSISTANT PROFESSOR, DEPT. OF COMMERCE, GFGC SAGAR 3

ROYALTY ACCOUNTS 4

1. On 1/1/2010 West Bengal Company come to on a royalty to Rs. 1 per ton of coal raised
the deadrent being Rs. 25000 per annum with right to recoup short working during the
first 5 years of lease the output for the first 5 years was as follows:
Year Output (Tonnes)
2010 15,000
2011 22,500
2012 27,500
2013 30,000
2014 37,500
Prepare Royalty table.
2. Mr. A owned certain patent rights he granted licence to Mr. B to use such rights on
royalty basis the following are the relevant particulars.
Year Minimum rent Royalty Earned
1st year 750 500
2nd year 1000 800
3rd year 1,350 900
4th year 1,500 1,750
th
5 year 1,500 1,600
The deficiency of any 1 year is to set off against access payable within the next 2 years
show Royalty table.

Journal Entries in the books of Lessee: (When minimum rent account is not
opened)
1. Royalty A/c_____________Dr
Shortworking A/c_________Dr
To Lessor A/c
(Being the amount due to Lessor)
2. Lessor A/c_____________Dr
To Bank A/c
(Being the amount paid to Lessor)
3. Royalties A/c____________Dr
To Shortworking A/c
To Lessor’s A/c
(Being the amount of shortworking recovered and amount paid to Lessor)
4. Profit & Loss A/c__________Dr
To Short working A/c
(Being the irrecoverable short working transferred to profit & Loss A/c)
5. P& L A/c ________________Dr
To Royalties A/c
(Being the royalties transferred to profit and loss account)

Journal Entries in the books of Lessee: (When minimum rent account is opened)

1. Minimum rent a/c_____________Dr

To Lessor A/c
(When minimum rent is due to lessor)
2.Royalties A/c_________________Dr
Shortworking A/c______________Dr
To Minimum rent A/c
(When minimum rent is transferred to royalties and short working account)

MEGHA BHOOTE, ASSISTANT PROFESSOR, DEPT. OF COMMERCE, GFGC SAGAR 4

 ROYALTY ACCOUNTS 5

3. Lessor A/c__________________Dr
To Bank A/c
(Being amount is paid to Lessor)
4. Profit and Loss A/c _____________Dr
To Royalties account
(When there is royalty is more than minimum rent this entry should be passed)
5. Profit & Loss A/c______________Dr
To Short working account
(when irrecoverable short working transferred to P & L Account)

3. On 1st January 2010 ABC limited leased some land for minimum rent of Rs. 3000 for
the first year, Rs. 5000 in the second year an there after Rs. 10,000 per annum merged
into a royalty of Rs. 50 paise per ton with power to recoup short working over two years
after the occurring of short working. The annual output for 5 years as follows
Year 2010 2011 2012 2013 2014
Output (in 3000 8600 22000 18000 30,000
tons) (Strike for
three years)
There was a provision in the lease that in the event of strike when minimum rent
not being reached the actual royalties earned for the year should discharge all the rental
obligations for that year. Prepare Royalty table and pass necessary journal entries in the
books of the Lessee.
4. The assam coal Limited Worked under lease which provide for the payment of royalty
at Rs. 50 paise per ton with the minimum rent of Rs. 17000 each years. Access of
minimum rent over the actual royalty being recoverable during the subsequent 3 years
the lease stibulate that if any year the normal rent was not attain by stoppage of work
for any reason the minimum rent was to be regarded as having been reduced in
proportion to the length of stoppage.
Year 2010 2011 2012 2013 2014 2015
Output (in 4000 28000 38000 46000 30000 50000
tons)
During 2014 there was a stoppage of work for 3 months pass the journal entries and
Ledger account.
5.
Year 2018 2019 2020 2021 2022
Output (in 1400 4,200 8,400 11,200 3,920
tons)
Minimum rent Rs. 1,400 Short recoupment is throughout the royalty agreement.
Royalty Rs. 50 paise per ton.
6. Lessor Rajam
Lessee Mango Publisher
Minimum rent 15,000 per annum
Royalty Rs. 5 per copy sold
Right of recoupment of shortworking over the first three years
Years No. of copies printed No. of copies of closing
stock
2010 2000 100
2011 3000 200
2012 4000 400

MEGHA BHOOTE, ASSISTANT PROFESSOR, DEPT. OF COMMERCE, GFGC SAGAR 5

ROYALTY ACCOUNTS 6

2013 5000 500

Prepare the minimum rent account, Royalties account, short working account and
Rajan’s account in the book of Mango Publishers
7. A Limited company acquired for coal mine from B company for 20 years the lease
contains that deficiency of any one year is to be set off against excess payable within
next 2 years details are below:
Years Minimum rent Royalty
2010 1500 1000
2011 2000 1600
2012 2500 1800
2013 3000 3500
2014 3000 3200
Prepared a necessary ledger account in the book of A Limited company.

8. From the following information prepare Royalty account, Landlord account and short
working account.
Royalty Rs. 20 per ton
Recoupment 50,000
Minimum rent Next 2 years
Event of Strike Proportionally
Year 2018 2019 2020 2021 (Strike 3 Months)
Output (in 2000 2200 2800 3000
tons)
9. Matha private Ltd took a coal mine on lease at a royalty of Rs. 4 per ton of coal raised
with a minimum rent of Rs. 1,60,000 per annum subject to the right of recoupment of
shortworkings in next two years. In a event of strike . The output during the 5 years was
Year 2018 2019 2020 2021 2022
(Strike 3
Months)
Output (in 20,000 36000 50000 24000 60000
tons)
10. A company got a leave of coal on the bases of Royalty of 1 per ton of coal raised subject
to a minimum rent of Rs. 20,000 the tennent has the right to recovery short working
during the 1st 4 years of Lease
Year 2018 2019 2020 2021 2022
(Strike 3
Months)
Output (in 9000 14000 26000 28000 60000
tons)

MEGHA BHOOTE, ASSISTANT PROFESSOR, DEPT. OF COMMERCE, GFGC SAGAR 6