ROYALTY ACCOUNTS

Some business which the owner has a right or monopoly

towards some goods or services can allow other firms to
exercise the right. The owner will get a gratuity based on how
far the rights have been exercised.

In other words, it is a transaction whereby an owner gives a

right to other company or user to use his/her own properties,
and in return, the user will then give a compensation or
payment which is known as royalty.

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Royalty is the remuneration payable to a person in
respect of the use of long-term assets such as
patent, trademarks, copyrights and computer
software. 

The main forms of royalty are:

Mining royalty – to extract mineral and ore from earth

The book publisher gives gratuity to the author / writer

For the use of a design

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 Royalty Agreement
A royalty agreement will normally contain clauses dealing with the following:

Minimum rent – guaranteed amount which the landlord, inventor or author is to

receive whatever the output maybe.

Royalty per unit per output

Right to recoup short-workings

Right to subject part or whole of tenancy agreement

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 Minimum Royalty and Short Workings

 The payment of royalty is based on the unit of output produced. However, if the sum of
royalty is less than the minimum rent (if any), then the payment will be based on the
minimum rent (minimum royalty – minimum rent).

 The difference between the royalty and the minimum rent is known as ‘Short Working’.
Normally, the tenant may obtain the right to recover the short-workings.

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 Accounting Entries In The Books Of Lessor

1. For the actual royalties:

Lessee's A/C...................Dr.
To Royalties A/C
To Shortworking A/c

2. For due amount received:

Bank A/C...............Dr.
To Lessee A/C

3. For royalties transferred:

Royalties A/C...........Dr.
To profit and loss A/C

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 With maintaining minimum rent account:

1. For minimum rent receivable:

Minimum rent A/c......................Dr.
To royalties A/C
To Shortworking A/C

2. For minimum rent due:

Lessee's A/C................Dr.
To minimum rent A/c

3. For due amount received:

Bank A/C....................Dr.
To Lessee's A/C

4. For Royalties transferred:

Profit and loss A/C...............Dr.
To Royalties A/C

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 B. When Royalty Is more Than Minimum Rent:

1. For royalties due:

Lessee's A/C....................Dr.
Shortworking A/C....Dr
T.o Royalty A/C

2. For short working recouped and royalty

received:
Bank A/C...................Dr.

To Lessee's A/C

3. For royalty and unrecouped shortworking

transferred:
Royalties A/C...............Dr.
Shortworking A/C........Dr.
To profit and loss A/C

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 C. When Royalty Is Equal To The Minimum Rent:

1. For the actual royalties:

Royalties A/C............Dr.
To landlord A/C

2. For the amount paid:

Landlord A/C...........Dr.
To Bank A/C

3. For transferring royalties:

Profit and loss A/C..........Dr.
To Royalties A/C

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