Satish Narayan provides a detailed overview of royalty payments and accounting. A royalty is a payment made to the owner of an asset for its use by another party. Examples include payments made to authors based on book sales. The document discusses key royalty terms like minimum rent, short workings, excess workings, and accounting entries for both the owner and user of the asset. It also provides examples and test questions to enhance understanding of royalties.

1. Satish Narayan
B.com, MBA(Finance), ACMA, (M.com)
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2. Topic : Royalty
References : Google, ICMAI, Investopedia, Yourarticlelibrary.
Disclaimer : All materials provided by me here is for information purposes only. Although every reasonable effort is made to present current and accurate information, I would make no
guarantees of any kind and cannot be held liable for any outdated or incorrect information. E&OE.

3. Topic : Royalty
Introduction :
A royalty is a payment to an owner for the use of property, especially patents,
copyrighted works, franchises or natural resources. A royalty payment is made
to the legal owner of the property, patent, copyrighted work or franchise by
those who wish to make use of it for the purposes of generating revenue or
other such desirable activities.
In most cases, royalties are designed to compensate the owner for the asset's
use, and they are legally binding.

4. Topic : Royalty
Introduction :
The owner of an asset (e.g. mines, quarries, patent, copyright, etc), as a
business arrangement, may allow other party (lessee, licencee, publisher, etc)
the right to use that asset against some consideration.
Such consideration is calculated with reference to the quantity produced or
sold. This payment to the owner by the user of the asset is termed as Royalty.

5. Topic : Royalty
Examples for better understanding:
When a publisher publishes a book, he makes a payment to the author which is based on
the number of copies sold, such payment known as Royalty.
The following are some of cases where one party paid to another in the form of Royalty:
• Where the owner of a mine allows another the right to extract minerals from land;
• Where right such as patents or copyrights are licensed in favor of another;
• Where an author, artist or designer gives exclusive rights to another to copy the work.

6. Topic : Royalty
Terminologies used with respect to Royalty :
a. Minimum Rent / Dead Rent :
Usually, there is a stipulation that in case of low output or low sales, a certain sum of money
will be payable in any case even if the royalties based on output or sales are lower. It means
that the sum payable is the minimum amount or actual royalties whichever is higher. The
minimum sum is known as minimum rent or dead rent.
Example : Thus, if A, the patentee, allows B to use his patent on a royalty of ₹ 2 per unit
produced subject to minimum of ₹ 10,000, then, in case the output is 4,000 units, the
amount payable will be ₹ 10,000 and in case the output is 7,000 units, it will be ₹ 14,000.

7. Topic : Royalty
b. Short workings/Redeemable Dead Rent :
The excess of minimum rent over actual royalties is termed as “short-workings’. In case,
such excess is irrecoverable, it should be Debited to “Short-workings Irrecoverable
Account” and Debited to Profit and Loss Account.
The question of short workings will arise only when there is a stipulation for minimum rent
in the agreement. In our example, Shortworkings is ₹ 2,000[10,000-8,000(4000*2)]
c. Excess working :
It refers to the amount by which the actual royalty exceeds the minimum rent. As per
example, Excess working is ₹ 4,000(14,000-10,000)

8. Topic : Royalty
d. Ground Rent/Surface Rent :
It refers to the fixed annual/yearly or half-yearly rent payable by the lessee to the landlord
in addition to the minimum rent.
e. Recoupment of Short workings :
Next Slide…..

9. Topic : Royalty
e. Recoupment of Short workings :
Usually, in a royalty agreement, a further provision is included about the recoupment of short-
working, i.e., the lessor allows the lessee the right to carry forward and set off the short-working
against the excess or surplus of royalties over the Minimum Rent in the subsequent years.
In other words, the lessor promises to adjust or return the excess which is charged in the first few
years out of excess earned in the later or subsequent years. This right is known as the right of
recoupment of short-working.
• Fixed right : When the lessee can recoup shortworkings within a certain period from the date of the lease it is
known as fixed right. Example, short workings can be recouped within three years from the date of the lease. So,
after three years from the date of the lease the short workings cannot be recouped.
• Fluctuating right : Under such type, lessee can recoup short workings of any year during the next following
year(s). Example, shortworkings can be recouped in the year subsequent to the year of short workings.

10. Topic : Royalty
f. Strike and Lockout etcetera :
If agreement so provides, the minimum rent may be proportionately reduced in the event of strike
and/ or lockout.
So special entry is required for the same except the adjustment of minimum rent for that particular
year.

11. Topic : Royalty
Accounting Entries in the Books of the Lessee/Licencee/Publisher etcetera :
1. Where a minimum rent exists with right to recoup short workings
(a) Where the actual royalty is less than the minimum rent
 Royalties (payable) Account Dr. [Actual royalties for the period]
Short workings Account Dr. [Minimum rent - Actual royalties]
To Landlord Account [Minimum rent]
 Landlord Account Dr. [Minimum rent]
To Bank Account[Net amount paid]
To Income Tax Payable Account [Tax deducted at source]
 Manufacturing / Profit & Loss Account Dr. [Transfer]
To Royalties (payable) Account [Actual royalties for the period]

12. Topic : Royalty
…continued :
If the user is a manufacturer and royalties are calculated on the basis of production, the actual royalties are
debited to Manufacturing Account. Where royalties are calculated on the basis of sales, they are debited to
Profit and Loss Account.
In case of a limited company, which does not prepare Manufacturing Account separately, the actual royalties
are debited to Profit and Loss Account and they are shown in production or manufacturing section of the Profit
and Loss Account.
Treatment of Short workings: As per agreed terms, short workings can be recouped in the year when the actual
royalty is more than the Minimum rent. Any short workings, which cannot be recouped within the specified period
becomes irrecoverable and it should be charged to Profit and Loss Account in the year in which the period ends.
However, the recoupable short workings should be carried forward and they are shown in the Balance Sheet as
a Current Asset.
The relationship between Minimum rent, Actual Royalty and Royalty payable are in below :
Minimum rent = Actual Royalty + Short workings.

13. Topic : Royalty
(b) Where the actual royalty is more than the minimum rent
 Royalties (payable) Account Dr.
To Landlord Account [Actual royalties for the period]
 Landlord Account Dr.
To Short workings Account(Short workings, if any, recouped)
 Landlord Account Dr.
To Bank Account
To Income Tax Payable Account
 Profit & Loss Account Dr.
To Short workings Account (Short workings, which can not be recouped)
 Manufacturing / Profit & Loss Account Dr.
To Royalties (payable) Account

14. Topic : Royalty
…continued :
Important Points to note :
1. When the royalty agreement does not contain a clause for minimum rent, the question of short workings and
its recoupment does not arise.
2. The landlord is always entitled to get either the minimum rent or the actual royalty whichever is higher subject
to any adjustment for short workings recouped.

15. Topic : Royalty
Accounting Entries in the Books of the Landlord / Lessor :
1. Where a minimum rent exists with right to recoup short workings
(a) Where the actual royalty is less than the minimum rent
 Lessee Account Dr. [Minimum rent]
To Royalty Receivable Account [Actual Royalties for the period]
To Royalty Suspense Account/Or Shortworkings Allowable A/c [Short fall in Royalties]
 Bank Account Dr. [Net amount paid]
Tax Deducted at source Dr. [Tax deducted at source]
To Lessee Account [Minimum rent]
• Royalties Receivable Account Dr.
To Profit & Loss Account [Transfer]

16. Topic : Royalty
(b) Where the actual royalty is more than the minimum rent:
 Royalty Suspense Account/ Or Short workings Allowable A/c Dr.
To Lessee Account [Recoupment of Short workings, if any]
 Bank Account Dr. [Net amount paid]
Tax Deducted at source Dr. [Tax deducted at source]
To Lessee Account
 Royalties (Receivable) Account Dr.
To Profit & Loss Account [Transfer]
 Royalty Suspense Account/Or Short workings Allowable A/c Dr.
To Profit and Loss Account [Short workings, which can not be recouped]

17. Topic : Royalty
Test Yourself : (Questions)
1. Ground Rent or Surface rent means :
(A) Minimum Royalty payable
(B) Maximum Royalty payable
(C) Fixed rent payable in addition to minimum rent
(D) Rent recovered at the end of lease term
2. Excess of minimum rent over royalty is know as :
(A) Maximum rent
(B) Excess workings
(C) Short workings
(D) Deficiency of actual royalty
3. Short workings can be recouped out of :
(A) Minimum rent
(B) Excess of actual Royalty over minimum rent
(C) Excess of minimum rent over actual Royalty
(D) Profit and Loss Account

18. Topic : Royalty
Test Yourself : (Answers)
1. Ground Rent or Surface rent means :
(C) Fixed rent payable in addition to minimum rent
2. Excess of minimum rent over royalty is know as :
(C) Short workings
3. Short workings can be recouped out of :
(B) Excess of actual Royalty over minimum rent

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Satish Narayan
B.com, MBA(Finance), ACMA, (M.com)
Get in touch with me