ROYALTY ACCOUNTS

An Individual, Firm, Company or any other institution pays a certain amount for acquiring a
special right for using other’s property as per the agreement. This amount which is paid as a
consideration for the use of Special Rights is called Royalty.

According to William Pickles, “Royalty is the remuneration payable to a person in respect of

the use of an asset, whether hired or purchased from such person, calculated by reference to and
varying with quantities produced or 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 types of royalty are very popular:
I. Mining Royalties,
II. 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 in case of mines. Minimum Rent is also known as Fixed Rent, Dead Rent,
Flat Rent or Contract Rent. If in any year amount of royalty is less than the amount of minimum
rent, the amount of minimum rent is payable by the person who has to pay the royalty, but if the
amount of royalty is more than the amount of minimum rent, royalty will be paid.
REDEEMABLE MINIMUM RENT:
Generally, when minimum rent is more than royalty, 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 excess of minimum rent over royalty paid in the earlier years
will be written off out of the excess of the royalty over minimum rent in the coming years such
minimum rent is called Redeemable Minimum Rent.
SHORTWORKINGS:
The excess of minimum rent over royalty is called ‘Shortworkings’.
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 during 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 transferred 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 of the year
P&L Account Dr.
To Royalties A/c
(Being the amount of royalties transferred to P&L A/c)
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 the 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 Dr.
To Royalties A/c
(Being the transfer of Royalties A/c to P&L A/c)
 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 Minimum Shortwork Shortworkings Amount paid U. R. S.W.
Year Output @Rs.1per Rent -ings Recoupled to Landlord transferred to
ton P&L A/c
Tons 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 the
Landlord)
Landlord A/c Dr. 10,000
To Bank A/c 10,000
(Being payment made to the landlord)
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. 13000
To Royalties A/c 12000
To Shortworkings A/c 1000
(Being balance of Royalties and unwritten balance of Shortworkings
Account Transferred to P&L A/c)
 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 20,000
To Royalties A/c 20000
(Being the balance of the Royalties Account transferred to
P& L A/c)

SUB-LEASE:
Sometimes a lessee grants a sub-lease to another 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.