Royalty Account

Class - BBA l st yr.

Subject - Financial Accounting

Subject type - Major 1

By AP N Jaiswal

As per accounting standards, a

Royalty Account tracks periodic payments (expenses or income) for using another's property, like patents, copyrights, or minerals, often as a percentage of sales or production. It's a contractual fee from a licensee to a licensor, differing from rent as it relates to intangibles or special rights and varies with usage, recorded in specific ledgers (Royalty Payable/Receivable) and transferred to P&L accounts. 

Key Aspects of Royalty Accounts

• Definition: A royalty is a fee paid for the right to use an asset (patent, trademark, software, mine, book).
• Parties Involved:
  • Licensor: The owner of the asset who receives royalties (income).
  • Licensee: The party paying for the right to use the asset (expense).
• Types of Assets: Intellectual property (patents, copyrights, trademarks), natural resources (minerals, oil), franchises, books.
• Calculation: Usually a percentage of revenue, per unit produced/sold, or a fixed rate.
• Accounting Treatment:
  • Lessee (Payer): Debits Royalty Expense (or Royalty Account) and credits Cash/Bank/Royalty Payable.
  • Lessor (Receiver): Credits Royalty Income (or Royalty Account) and debits Cash/Bank/Royalty Receivable.
• Short Working (for mining/resources):
  
  

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  When actual royalties fall below a pre-agreed minimum rent, the excess (short working) can often be carried forward as an asset to be recouped later.
• Standard Alignment: Governed by principles in Cost Accounting Standards (like CAS-20 in India) and general accounting principles for intangible assets and revenue recognition.