ROYALTY ACCOUNTS

Introduction-Meaning- Terms used in royalty agreement: Lessee, Lessor,

Minimum Rent – Short Workings –Recoupment of Short Working–Accounting
Treatment in the books of Lessee only – Journal Entries and Ledger Accounts
including minimum rent account. (Sub-lease and lessor books excluded)-
problems
MEANING OF ROYALTY
Royalty is payable by a user to the owner of the property or something on which
an owner has some special rights. A royalty agreement is prepared between the
owner and the user of such property or rights. If payment is made to purchase
the right or property that will be treated as capital expenditure instead of a
Royalty.
IMPORTANT TERMS
1. LESSEE
Lessor is also called as user of the asset received from its legal user. He uses the
copy rights/ property/asset of the real owner and makes the payment of royalty
periodically as per the agreement .
2. LESSOR
Lessor is also called as the real owner of the asset.
3. ROYALTY AGREEMENT
A legal agreement made between lessee and lessor to use the asset or copyright
of lessor by lessee for productive or commercial operations which generate the
revenue, under which a consideration called royalty is payable to the lessor
periodically.
4. MINIMUM RENT
It is also called as fixed rent or dead rent . it is a minimum amount of rent or
consideration payable to the lessor by the lessee for the use of asset irrespective
of sale or production achieved.
Minimum rent = actual royalty + short workings

5. SHORT WORKINGS
It is an excess amount of minimum rent paid over the actual royalty calculated
on sales or production. It appears when the minimum rent is payable to the
lessor and makes an amount of extra expenses to the lessee, but shall be
recovered when amount of royalty reaches more than the minimum rent in any
succeeding years.
Short workings= minimum rent – actual royalty
6. RECOUPMENT OF SHORT WORKINGS
It is a process of recovery of short working of certain period where the royalty
is less than minimum rent against the surplus royalty where actual royalty is
higher than minimum rent of subsequent period.

ROYALTY ACCOUNTS
ANALYTICAL TABLE
Year Output Royalty on Minimum Surplus Treatment of short workings[f] Actual
/ sales payment
[a] production/ Rent [e] Short Short Short
[b] workin working working to lessor
sales [d] [c-d] g [d-c] recovered irrecovered
[g]
[c]