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Definition Of Royalty Accounts

A royalty aggrement is an aggrement bewtween two parties that is the person who gives out his special rights and the person who takes out the special right on lease for a consideration. Lesser: The person who gives out some special right over something to another person for a consideration is called lesser. Lessee: The person who takes out some special right from its owner on lease for a consideration is called lessee.


Types Of Royalty

Three types of royalty:Mining royalty: A mining royalty is the periodical payment generally made on output, made by a lessee of a mine to the lesser. Patent royalty: It is a periodical payment based on output made by lessee of a patent or a patent right to be lesser or a patentee. Copyright royalty: It is the periodical payment based on sales, made by lessee of a copyright to a lesser.

Distinction between Rent & Royality

Rent: It is consideration payable for the use of only tangible assets. It is payable on basis of time. The amount of rent is generally fixed with regards to time. There is no concept of minimum rent. The parties are known as tenant and landlord. Royality: It is the consideration for the use of special right for both tangible and intangible assets. It is paid on production yield or sale basis. Amount of royality is variable and is calculated in accordance with production or sales. It generally contains a clause in the aggreement to pay minimum rent. Parties are known as lessee / spatenty /publisher & lesser/ patentholder / Author etc.

1. 2. 3. 4. 5.  1. 2. 3. 4. 5.

Terms related to royalty account:    

Minimum Rent Shortworkings Ground Rent Right of Recouping Shortworkings Surplus

Minimum Rent

Royality agreements are usually associated with a clause that the lessor or landlord must receive a minimum amount what ever be the production or sales in a particular period. Such a minimum amount is known as minimum rent or dead rent or fixed rent. It gives incentive to the lessee to increase the production or sales. Since the guarantee is for the payment of minimum amount, it has the effect of paying actual royalty based on output or sales or minimum rent, whichever is higher.


The excess of minimum rent over royalty calculated on the basis of output or sales is termed as shortworkings. Normally shortworkings are during gestation period or due to abnormal working condition or during the early periods of lease as the activity level in that period.

Ground Rent

It is the fixed yearly or half yearly rent payable by the lessee to the landlord in addition to the minimum rent.

Right of recouping shortworkings

Usually in the first few years of the royalty aggreement, the work does not gather the required momentum because of the time taken in the prepration for starting the production or publishing up the sales, so shortworkings arising in the first few years may not be due to inefficiency of the lessee. Keeping this in view, royalty agreement may contain a clause that shortworkings are recoverable by the lessee in subsequent years when royalties are in excess of minimum rent. The right of getting back the excess payment made by the lessee in earlier years is called right of recoupment of shortworkings.


It indicates the excess of actual amount of royalty over minimum rent. Surplus = Actual Royalty Minimum Rent Shortworkings can be recouped only when the lessee has a right to recoup and there is a surplus.

Accounting Entries in the books of lessee

(I) When there are no royalties in a year a) If the minimum rent is not opened Shortworkings account To Landlord Account b) If minimum rent is opened (i) Minimum rent account To landlord account (ii) Shortworkings account To minimum rent account



When royalties are less than the minimumm rent and shortworkings are recoverable in subsequent years : Dr Dr

If minimum rent account is opened a) Royalties account Shortworkings account To landlord account

b) Landlord account To Bank account c) Profit or loss account To Royalties account


Dr Dr

When royalties are equal to minimum rent in a year Royalties account To Landlord account Dr recouped :

(IV) When royalties exceed the minimum rent and shortworkings are a) Royalties account To Landlord account b) Landlord account To shortworkings account To Bank account c) Profit and Loss A/C To Royalties account Dr Dr Dr

Payment of nazrana or lease premium in addition to royalty

The lessee may agree to pay lumsum amount to the lessor in addition to royalty. This extra payment in addition to royalty in known as nazrana or lease premium or goodwill. Under such a situation a nazrana account is opened in the books of lessee and lessor. In the books of the lessee, the whole amount of nazrana is debited to Nazrana Account and the equal amount is credited to profit and loss account each year during the life of lessee.

Copyright Royalties
Copyright means the sole right granted by law to an author to publish and sell his book in the market. The author generally gives the right to a firm of publishers to do the production and sales of the book for a consideration. This consideration may be a lumpsum payment or a fixed percentage as agreed between the author and the publisher on the number of books sold multiplied by the printed price of the books sold.

Damage payable by the lessor (Author) to the lessee (Publisher)

The royalty agreement may contains a cause that the author should revise a book and give the revised manuscript to the publisher for publication within a stipulated period failing which the author should pay some aompensation of damage to the publisher. If there is such a clause in the agreement and there is default on the part of the author he becomes liable to pay damages or compensation to the publishers. Damage receive is credited in books of publishers and damage payable is debited in books of Author. The damage payable by the author to the publisher are not actually paid in cash. These are generally set off against the royalty recievable from the publishers.

Sub-Lease (Or Sub-Royalty)

The terms of the original lease may empower the lessee to sublet a part of the lease to another person as a sub-lease. The transfer of a part of the right held by the lessee to another lessee is sub-lease. In such a case, the status of the original lessee will be two fold: as lessee paying royalties to the landlord and as a sub-lessor receiving royalties from the sub-lessee. As lessee he maintai Royalties payable account, Shgortworkings account and the landlords account and as sub-lessor he maintain Royalties receivable account, Shortworkings suspense account and sub-lesses account. A point of importance in case of sub-lease is that production or sales by the sub-lessee under sub-lease will be considered to be production or sales under the original lease and royalties payable to the original landlord will be calculated on the basis of total production or sales of both the lessee and the sub-lessee.

X Ltd. Took a mine on lease from Y at a given rate of royalty with a minimum rent of Rs. 10,000 a year. Each year s excess of minimum rent over royalties is recoverable out of the next year only. In the event of a strikes and the minimum rent not being reached, it was provided that the actual royalties earned for the year would be the full royalty obligation for the year. The results of the working were as follows: Actual Royalties First year NIL Second year 8,000 Third year (strike) 8,000 Fourth Year 9,000 Draw up shortworkings account, minimum rent account and royalties account for all the years in the books of X ltd.

Year I II To Minimum Rent A/c To Balance b/d To Minimum Rent A/c Rs. 10,000 10,000 2,000 12,000 III IV To balance b/d To Minimum Rent A/c 2,000 1,000 III IV By Profit and Loss A/c By Balance c/d Year I II By Balance c/d By Profit and Loss A/c By Balance c/d 10,000 10,000 2,000 12,000 2,000 1,000

Year II III IV To Minimum Rent A/c To Y To Minimum Rent A/c 8,000 8,000 9,000 Year II III IV By Profit & Loss A/c By Profit & Loss A/c By Profit & Loss A/c 8,000 8,000 9,000

Year I II To Y To Y Rs. 10,000 10,000 10,000 IV To Y 10,000 10,000 IV By Royalties A/c By Shortworkings A/c Year I II By Shortworkings A/c By Royalties A/c By Shortworkings A/c Rs. 10,000 8,000 2,000 10,000 9,000 1,000 10,000

Submitted to: Ms. Neelam Bhatia

Submitted BY: Ritu sharma Roll no. 4111 B.COM 1st year

Thankyou :-