Royalty Accounts: Accounting Treatment in Books of Lessor (2024)

A lease is an agreement where a person acquires a right to use an asset for a certain period of time from another person or the owner of the asset in return for a payment. The owner is the Lessor. The user is the Lessee. The amount paid is Royalty.

Accounting Treatment in books of Lessor

Royalty is the sum payable by the lessee to the lessor for the use of rights vested in the lessor. It is a periodic payment. It is generally paid on the basis of output or sale. Royalty is paid for extraction of mines, for use of a patent, for use of technical know-how, to an author for sale of his books, etc.

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Royalty and related Terminologies
Accounting Treatment in Books of Lessee

Journal Entries in the books of the Lessor

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. For Royalty due	Lessee’s A/c (Minimum Rent)	Dr.	xx
	To Royalty receivable A/c (Actual Royalty)			xx
	To Short-workings Allowable A/c			xx
	(Being royalty due from the lessee and short-workings allowed)
2. For payment received	Bank A/c	Dr.	xx
	To Lessee’s A/c			xx
	(Being money received from the lessee)
3. When short-workings are recouped	Short-workings Allowable A/c	Dr.	xx
	To Lessee A/c			xx
	(Being amount of short-workings recouped)
4. For irrecoverable short-workings	Short-workings Allowable A/c	Dr.	xx
	To Profit and Loss A/c			xx
	(Being the amount of short-workings lapsed)
5. For transferring Royalty at the year end	Royalty receivable A/c	Dr.	xx
	To Trading/ P&L /Manufacturing A/c			xx
	(Being royalty received transferred to the Trading/ P&L /Manufacturing A/c at end of the year)

Solved Example for You

Q: X Ltd. took a right to publish and sell a book from Bharat for 5 years. The minimum rent is ₹20000. Royalty is ₹5 per book. Bharat has allowed a right to recoup the short-workings to the X Ltd. in the first 4 years. The sales in the 5 years are:

Year	Books sold
1	2500
2	3000
3	4500
4	5000
5	6000

Calculate the Royalty payable and short-workings. Also, pass the necessary journal entries in the books of Bharat for 5 years. You are also required to prepare the account of X Ltd. The books are closed on 31^st March every year.

Ans: In the books of Bharat

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1^st Year
31^st Mar	X Ltd’s A/c	Dr.	20000
	To Royalty receivable A/c			12500
	To Short-workings Allowable A/c			7500
	(Being royalty due from X Ltd. and short-workings allowed)
31^st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31^st Mar	Royalty receivable A/c	Dr.	12500
	To Profit &Loss A/c			12500
	(Being royalty received transferred to the Profit &Loss A/c)
2^nd Year
31^st Mar	X Ltd’s A/c	Dr.	20000
	To Royalty receivable A/c			15000
	To Short-workings Allowable A/c			5000
	(Being royalty due from X Ltd. and short-workings allowed)
31^st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31^st Mar	Royalty receivable A/c	Dr.	15000
	To Profit &Loss A/c			15000
	(Being royalty received transferred to the Profit &Loss A/c)
3^rd Year
31^st Mar	X Ltd’s A/c	Dr.	22500
	To Royalty receivable A/c			22500
	(Being royalty due from X Ltd.)
31^st Mar	Short-workings Allowable A/c	Dr.	2500
	To X Ltd.’s A/c			2500
	(Being amount of short-workings recouped)
31^st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31^st Mar	Royalty receivable A/c	Dr.	22500
	To Profit &Loss A/c			22500
	(Being royalty received transferred to the Profit &Loss A/c)
4^th Year
31^st Mar	X Ltd’s A/c	Dr.	25000
	To Royalty receivable A/c			25000
	(Being royalty due from X Ltd.)
31^st Mar	Short-workings Allowable A/c	Dr.	5000
	To X Ltd.’s A/c			5000
	(Being amount of short-workings recouped)
31^st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31^st Mar	Royalty receivable A/c	Dr.	25000
	To Profit &Loss A/c			25000
	(Being royalty received transferred to the Profit &Loss A/c)
5^th Year
31^st Mar	X Ltd’s A/c	Dr.	30000
	To Royalty receivable A/c			30000
	(Being royalty due from X Ltd.)
31^st Mar	Bank A/c	Dr.	30000
	To X Ltd.’s A/c			30000
	(Being money received from X Ltd.)
31^st Mar	Royalty receivable A/c	Dr.	30000
	To Profit &Loss A/c			30000
	(Being royalty received transferred to the Profit &Loss A/c)
31^st Mar	Short-workings Allowable A/c	Dr.	5000
	To Profit and Loss A/c			5000
	(Being the amount of short-workings lapsed)

X Ltd.’s A/c

Date	Particulars	Amount	Date	Particulars	Amount
1^st Year			1^st Year
31 Mar	To Royalty receivable A/c	12500	31 Mar	By Bank A/c	20000
31 Mar	To Short-workings Allowable A/c	7500

		20000			20000
2^nd Year			2^nd Year
31 Mar	To Royalty receivable A/c	15000	31 Mar	By Bank A/c	20000
31 Mar	To Short-workings Allowable A/c	5000

		20000			20000
3^rd Year			3^rd Year
31 Mar	To Royalty receivable A/c	22500	31 Mar	By Short-workings Allowable A/c	2500
			31 Mar	By Bank A/c	20000

		22500			22500
4^th Year			4^th Year
31 Mar	To Royalty receivable A/c	25000	31 Mar	By Short-workings Allowable A/c	5000
			31 Mar	By Bank A/c	20000

		25000			25000
5^th Year			5^th Year
31 Mar	To Royalty receivable A/c	30000	31 Mar	By Bank A/c	30000

		30000			30000

Working Notes:

Calculation of Royalty, Minimum Rent and Short-workings

Year	Books sold	Rate per book	Royalty	Minimum Rent	Short-workings
1	2500	5	12500	20000	7500
2	3000	5	15000	20000	5000
3	4500	5	22500	20000
4	5000	5	25000	20000
5	6000	5	30000	20000

Computation of Recoupment, Short-workings carried forward and transferred to profit and loss A/c

Year	Recoupment	Short-workings carried forward	Transferred to P&L A/c	Payment to Bharat
1		7500		20000
2		12500		20000
3	2500	10000		20000
4	5000	5000	5000	20000
5				30000