BC 2116
MODULE 1
ROYALTY ACCOUNTS
Semester II
Financial Accounting II
Dr. Christo Selvan
TOPICS TO COVER
Meaning, definition and Technical Terms
Royalty – Landlord – Tenant
Minimum Rent – Short Workings
Recoupment of Short Working under (Fixed
Period) restrictive and non-restrictive
(Floating Period)
Recoupment within the Life of the Lease
Treatment of Strike and Stoppage of work
Accounting Treatment in the books of Lessee
and lessor
journal entries and Ledger Accounts
including minimum rent account
INTRO
Royalty is an amount payable for utilising the
benefits of certain rights vested with some other
person.
Eg:
1. right of ground or land (of the Landlord)
2. A Patent right (of an inventor)
3. Copyright (of an author)
When rights are leased:
Owner receives consideration: ROYALTY / rent
Person who leases the right: LESSOR / OWNER
Who borrows (gets) the right: LESSEE / TENANT
TECHNICAL TERMS - MEANING
Royalty:
paid as a consideration to the owner for the use of
right (or)
Compensation payable by the lessee (tenant) to
the lessor (owner) for using the right of the owner.
Royalty account is a nominal account.
Lessor: income Lessee: expenditure
Transferred to profit and loss account or
production account depending upon its treatment
as direct or indirect expense and the account is
closed.
TECHNICAL TERMS - MEANING
Landlord:
Owner / patentee / author.
Leased the land to the lessee
Right to receive royalty
If the lessee fails to honour the
agreement, the lessor has the right to
cancel the lease or sue the lessee for
recovery of royalty
TECHNICAL TERMS - MEANING
Tenant or Lessee:
Gets the right of enjoyment of the lease from the
landlord
The tenant has an obligation to pay either the
minimum rent or royalty whichever is higher to
the lessor.
If the lease agreement permits, he gets the right of
recoupment of short workings
TECHNICAL TERMS - MEANING
Minimum rent:
Minimum amount guaranteed to the lessor by the
lessee in the initial stages of the agreement when
the production is very low.
Minimum rent payable only when there is no
production resulting in Royalty or the Royalty is
less than the Minimum Rent.
Minimum rent account is a nominal account.
Also called as DEAD RENT / ROCK RENT / FIXED
RENT.
TECHNICAL TERMS - MEANING
Short workings:
The difference between the Minimum Rent and the actual
Royalties is called ‘Short workings’
Treatment of
short-workings Lessor
treats as a liability
Lessee
under Royalty
treats as an asset suspense account
under short
workings
account.
Short workings facilitates the lessee to recover the loss
caused due to payment of Minimum Rent in the years in
which the Royalty has fallen short due to no production or
lower production.
Irrecoverable short workings should be transferred to
profit and loss account.
TECHNICAL TERMS - MEANING
Recoupment of short working:
The right of the lessee (tenant) to recover the
short working of the earlier years.
Possible only if the agreement provides the
same.
Recoupment of short working is considered under
different time periods:
Recoupment of short working under fixed period.
Recoupment of short workings under floating period
Recoupment within the life of lease.
* Question 1
ACCOUNTING TREATMENT
The accounting treatment of Royalties
depends on whether:
1. The Minimum Rent is more than
the royalties or
2. The Royalties are equal to or more
than the Minimum Rent