ROYALTY ACCOUNTS An Individual, Firm, Company or any other ot her institution pays a certain amount for acquiring acq uiring a special right for using other¶s property as per the agree ment. This amount which is paid as a consideration for the use of Special Rights is called Royalty. According to William Pickles , ³Royalty is the remuneration payable to a person in respect of
the use of an asset, whether hired or purchased from such person, ca lculated by reference to and varying with quantities produced or o r sold as a result of such asset.´ Royalty is a periodical payment by one person to another in considering some rights. The person who makes the payment for the use of asset or right is called lessee .The owner of the asset to whom payment is paid is called lessor or landlord. Royalty is a business expense and closed and transferred to profit and loss account. Types of Royalties:
There are many types of royalties but following following types t ypes of royalty are very popular: I. II.
Mining Royal Ro yalties, ties, Brick-making Royalties,
III.
Oils-wells Royalties,
IV.
Patent Royalties
V.
Copyright Royalties
MININMUM
RENT:
Minimum Rent is the amount below which landlord never accepts in any year from the person who has to pay royalty ro yalty in case of mines. Minimum Rent is also kno wn as Fixed Rent, Dead Rent, Flat Rent or Contract Rent. If in any year amount of royalty is less than the t he amount of minimum rent, the amount of o f minimum minimum rent is payable by the person who has to pay the royalty, but if the amount of royalty is more than t han the amount of minimum rent, royalty will be pa id. REDEEMABLE MINIMUM RENT:
Generally, when minimum rent is more than ro yalty, then minimum rent is payable if no such provision is given in the agreement, but if it is mentioned in the agreement that when royalty will be more than minimum rent, the t he excess of minimum rent over royalty paid in the ear lier years will be written off out of the excess o f the royalty over minimum rent in the coming co ming years such minimum rent is called Redeemable Minimum Rent.
SHORTWORK INGS:
The excess of minimum rent over royalty is called µShortworkings¶. Minimum Rent ± Royalty = Shortworkings or M.R. ± R = S.W. Recoupment or Writing off Shortworkings:
All the conditions regarding recoupment or writing off shortworkings are based on the mutual agreement between the lessee and lessor. Shortworkings may be recouped in all the future years or it may be recouped throughout the period of lease. It may be recouped during the first four years of the lease. In that case, recoupment will take place only dur ing the first four years, and not afterwards, in the fourth year unwritten balance of shortworking will be transferred to the Profit and Loss Account and future year¶s shortworkings will also be t ransferred to the Profit and Loss Account of the concerning year. ACCOUNTING RECORD FOR MINING ROYALTIES
When a mine is given on lease, the person who gives it on lease is known as lessor or landlord and the person who takes it on lease is known as lessee. Royalty is paid by the lessee to the landlord. Accounting Record in the Books OF Lessee A). When Royalty is less than
Minimum
Rent
i). When Royalty is payable Royalties A/c
Dr.
Shortworkings A/c
Dr.
To Landlord (Being royalities earned and shortworkings to be payable to the landlord) ii). When payment is made Landlord A/c
Dr.
To Bank A/c (Being amount paid to landlord) iii). For Closing Royalty Account at the end o f the year P&L Account To Royalties A/c (Being the amount of royalties transferred to P&L A/c)
Dr.
B).When Royalty is more than
Minimum
Rent
i). When Royalty is payable Royalties A/c
Dr.
To Landlord A/c (Being royalties earned and payable to landlord) ii). For Writing off Shortworkings, if any Landlord A/c
Dr.
To Shortworkings A/c (Being recoupment of S.W. of earlier years) iii). For Payment of Amount Landlord A/c
Dr.
To Bank A/c (Being payment made to landlord) iv). For Closing the Royalty Account at t he end of the year P&L A/c
Dr.
To Royalties A/c (Being transfer of Royalties to P&L A/c) C). When Royalty is equal to Minimum Rent
i). When Royalty is payable Royalties A/c
Dr.
To Landlord A/c (Being royalties earned and payable to landlord) ii). When payment is made Landlord A/c
Dr.
To Bank A/c (Being payment made to the landlord) iii). When Royalty Account is closed at the end of the year P&L A/c To Royalties A/c (Being the transfer of Royalties A/c to P&L A/c)
Dr.
Illustration
1:
A Coal Company takes a lease of a mine for a term of four years from 1st Jan, 2006, paying a minimum rent of Rs.10, 000 p.a., merging in a royalty of Rs.1 per ton of coal raised. The lease contains provision to the effect that if the minimum rent paid in any year exceeds the royalty for the year, the amount of the excess may be recouped by the coal company out of the royalty payable in the following year only. Coal is raised as follows: Year
:
2006
2007
2008
2009
Tons
:
2,000
7,000
12,000
20,000
Pass the necessary journal entries to record these transactions in the books of the Coal Company. Solution: Analytical Table Royalties Year
Output
Minimum
@Rs.1per
Shortwork
Rent
-ings
Shortworkings Amount paid U. R. S.W. Recoupled
to Landlord
ton Tons
transferred to P&L A/c
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
2006
2000
2000
10,000
8000
-
10,000
2007
7000
7000
10,000
3000
-
10,000
8000
2008
12000
12000
10,000
2000
10000
1000
2009
20000
20000
10,000
20,000
Journal Entries in the books of Coal Company
2006 Dec.31
Royalties A/c
Dr.
2000
Shortworkings A/c
Dr.
8000
To Landlord A/c
10,000
(Being Royalties and Shortworkings to be paid to t he Landlord) Landlord A/c To Bank A/c (Being payment made to the landlord)
Dr.
10,000 10,000
Profit and Loss A/c
Dr.
2000
To Royalties A/c
2000
(Being the amount of Royalties transferred to P&L A/c) 2007 Dec.31
Royalties A/c
Dr.
7000
Shortworkings A/c
Dr.
3000
To Landlord A/c
10000
(Being Royalties earned and Shortworkings to be paid to the Landlord) Landlord A/c
Dr.
10000
To Bank A/c
10000
(Being payment made to the Landlord) Profit and Loss A/c
Dr.
15000
To Royalties A/c
7000
To Shortworkings A/c
8000
(Being Royalties and unwritten balance of Shortworkings transferred to P&L A/c) 2008 Dec.31
Royalties A/c
Dr.
12000
To Landlord A/c
12000
(Being Royalty earned and payable to Landlord) Landlord A/c
Dr.
12000
To Shortworkings A/c
2000
To Bank A/c
10000
(Being Shortworkings to the extent of Rs.2000 recouped and balance paid to the Landlord) Profit and Loss A/c
Dr.
To Royalties A/c To Shortworkings A/c (Being balance of Royalties and unwritten balance o f Shortworkings Account Transferred to P&L A/c)
13000 12000 1000
2009 Dec.31
Royalties A/c
Dr.
20,000
To Landlord A/c
20000
(Being Royalties earned and payable to Landlord) Landlord A/c
Dr.
20,000
To Bank A/c
20000
(Being payment made to Landlord) Profit and Loss A/c To Royalties A/c
20,000 20000
(Being the balance of the Royalties Account transferred to P& L A/c)
SUB-LEASE:
Sometimes a lessee grants a sub-lease to anot her person either for the whole land or for the portion of it. The person, to whom a sub-lease is granted, is called sub-lessee. In such a case whatever yield is taken out by the lessee and sub-lessee is added and on this total yield lessee has to pay royalty to the landlord.
