# Royalty Accounts – CA Foundation, CPT notes, PDF

This article is about Royalty Accounts for CA foundation CPT students. we also provide PDF file at the end.

**What we will study in Royalty Accounts CA Foundation Notes:**

**18.1 MEANING OF ROYALTY**

♦ Royalty is a payment made for the use of a special right.

♦ The sum payable as consideration for use of any special right, for a definite period, according to mutual agreement, and based on prescribed terms and conditions, is treated as royalty.

♦ It includes consideration payable for the use of both intellectual, property and physical assets.

**The Amount is mostly payable on**

- Patented article
- Mining operations.
- Publishing of a book.
- Manufacturing etc.

**Types of Royalties**

- Copyright
- Mining
- Patent
- Trademark etc.

**18.2 MINIMUM RENT**

It is the fixed minimum amount that has to be paid to the landlord. The reason behind fixing minimum rent is to avoid the loss that may be suffered by the landlord in case of less amount of royalty. .

If in any year the amount of royalty is less than the amount of minimum rent (as mentioned in the agreement of royalty), the amount of minimum rent will be payable by the lessee. If the amount of royalty is more, the amount of royalty will be paid.

**Shortworkings**

Short workings is the amount by which minimum rent exceeds royalty. Thus, **[Minimum Rent **– **Royalty **= **Shortworkings (s.w.)]**

In the case of short-workings, that is, if in any year royalty will be less than minimum rent, the amount of minimum rent has to be paid.

**Redeemable shortworkings **: Amount of short workings which may be recouped is known as Redeemable short workings.

**Recoupment or writing off shortworkings **: When royalty is more than minimum rent, the amount of short workings of the earlier periods may be recouped /written off out of the excess royalty amount over minimum rent. All the conditions regarding recoupment of shortworkings are based on the mutual agreement of the lessor and lessee.

**Accounting records for Mining Royalties **: The person who gives the mine on lease, is called lessor or landlord. The person who takes it on lease is known as lessee. The amount of royalty is payable by the lessee to the lessor.

**Accounting entries 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 a/c

(Being royalties earned and short workings 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 at the end of the year**

Profit and loss a/c Dr.

To Royalty a/c

(Being amount of royalty transferred to Profit & Loss 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 & payable to landlord)

**(**ii)** For writing off shortworkings, if any**

Landlord a/c Dr.

To shortworkings a/c

(Being recoupment of shortworkings of earlier years)

(iii)** For payment of amount**

Landlord a/c Dr.

To Bank a/c

(Being payment made to landlord)

OR

In place of above two entries, the following combined entry can be passed :

Landlord a/c Dr.

To shortworkings a/c

To Bank a/c

(Being recoupment of shortworkings and balance paid)

**(iv) For closing Royalty at the end of the year**

Profit and loss a/c Dr.

To Royalties a/c

(Being transfer of royalty amount to Profit & Loss a/c)

**Accounting entries in the books of Landlord/Lessor**

(a)** When Royalty is less than minimum rent**

**(i) At the time when royalty is receivable**

Lessee’s a/c Dr.

To Royalty receivable a/c

To Royalty Reserve/suspense a/c

(Being the amount of royalty receivable and the difference between minimum rent and royalties receivable transferred to royalty reserve a/c)

**(ii) When payment is received**

Bank a/c Dr.

To Lessee’s a/c

(Being the amount received from lessee)

**(iii) For closing royalty receivable a/c**

Royalty receivable a/c Dr.

To Profit & loss a/c

(Being transfer of royalties receivable to Profit & Loss a/c)

**(**b**) When Royalty is more than minimum rent**

**(i) When Royalty is receivable**

Lessee’s a/c Dr.

To Royalty receivable a/c

(Being the amount of royalties receivable earned)

(ii) **For writing off Royalty reserve a/c and on receipt of royalty amount**

Royalty res erve / suspense a/c Dr.

To Lessee’s a/c

(Being the amount of royalty reserve recouped and the balance received from lessee)

(iii) **For closing royalty receivable a/c**

Royal ties receivable a/ c Dr.

To Profit and loss a/c

(Being transfer of royalties a/c to Profit and loss a/c)

**Journal Entries regarding minimum Rent**

(i) Royalty a/c Dr.

Shortworking a/c Dr.

To Minimum Rent a/c

(ii) Minimum Rent a/c Dr.

To Landlord a/c

Note : Minimum rent a/c may be opened only in those years when royalty is less than minimum rent.

**Illustration 18.1**

Minimum Rent – Rs. 2,000.

Royalty rate is Rs. 1 per ton.

Output for 5 years were as follows:-

1st year | 400 tons |

Ilnd year | 1,700 tons |

IIIrd year | 2,000 tons |

IVth year | 3,900 tons |

Vth year | 5,000 tons |

Short working of any year may be recouped throughout the life of the lease.

Give analytical table, journal entries in the books of lessee and in the books of lessor. Solution :

**Analytical Table**

Yr. | output | Royalty @ 1 | Min.Rent (MR) | Shortworking (SIT) | Recoupment | LandlordPayment | Transfer toP&L a/c |

I | 400 | 400 | 2000 | 1600 | — | 2000 | — |

II | 1700 | 1700 | 2000 | 300 | — | 2000 | — |

III | 2000 | 2000 | 2000 | — | — | 2000 | — |

IV | 3900 | 3900 | 2000 | _ | 1900 | 2000 | — |

V | 5000 | 5000 | 2000 | — | — | 5000 | — |

**Journal Entries**

**In the books of lessee**

S.No. | Particulars | L.F. | Amount Rs. | Amount Rs. | |||

1st year | |||||||

1. | When royalty is payable :- | ||||||

Royalty a/c | Dr. | 400 | |||||

Short working a/c | Dr. | 1600 | |||||

To Landlord a/c | 2000 | ||||||

2. | When payment is made :- | ||||||

Landlord a/c | Dr. | 2000 | |||||

To Cash/Bank a/c | 2000 | ||||||

3. | For closing royalty a/c :- | ||||||

Profit/Loss a/c | Dr. | 400 | |||||

To Royalty a/c | 400 | ||||||

Ilnd year | |||||||

1. | When Royalty is payable :- | ||||||

Royalty a/c | Dr. | 1700 | |||||

Short working a/c | Dr. | 300 | |||||

To Landlord a/c | 2000 | ||||||

2. | When payment is made :- | ||||||

Landlord a/c | Dr. | 2000 | |||||

To Cash/Bank a/c | 2000 | ||||||

3. | For closing royalty a/c :- | ||||||

Profit & loss a/c | Dr. | 1700 | |||||

To Royalty a/c | 1700 | ||||||

Illrd year | |||||||

1. | When royalty is payable :- | ||||||

Royalty a/c | Dr. | 2000 | |||||

To Landlord a/c | 2000 | ||||||

2. | When payment is done :- | ||||||

Landlord a/c | Dr. | 2000 | |||||

To Bank a/c | 2000 | ||||||

3. | For closing royalty a/c at the end of the year :- | ||||||

Profit & Loss a/c | Dr. | 2000 | |||||

To Royalty a/c | 2000 | ||||||

IVth year | |||||||

1. | When royalty is payable :- | ||||||

Royalty a/c | Dr. | 3900 | |||||

To Landlord a/c | 3900 | ||||||

2. | For writing off shortworkings and payment of amount :- | ||||||

Landlord a/c | Dr. | 3900 | |||||

To Bank a/c | 2000 | ||||||

To short working a/ c | 1900 | ||||||

3. | For closing royalty a/c :- | ||||||

Profit & Loss a/c | Dr. | 3900 | |||||

To Royalty a/c | 3900 | ||||||

Vth year | |||||||

1. | When royalty is payable :-Royalty a/c To Landlord a/c | Dr. | 5000 | 5000 | |||

2. | For payment of amount :-Landlord a/c To Bank a/c | Dr. | 5000 | 5000 | |||

3. | For closing royalty a/c :-Profit & Loss a/c To Royalty a/c | Dr. | 5000 | 5000 | |||

**Journal Entries**

**In the books of Landlord (Lessor)**

S.No. | Particulars | L.F. | Amount Rs. | Amount Rs. | ||

1st year | ||||||

1. | When royalty is receivable :-Lessee a/c To Royalty receivable a/c To Royalty Reserve/suspense a/c | Dr. | 2000 | 4001600 | ||

2. | When payment is received :-Bank a/c To Lessee | Dr. | 2000 | 2000 | ||

3. | For closing royalty receivable a/c :-Royalty receivable a/c To P/L a/c | Dr. | 400 | 400 | ||

Ilnd year | ||||||

1. | When Royalty is receivable :-Lessee’s a/c To Royalty receivable a/c To Royalty reserve a/c | Dr. | 2000 | 1700300 | ||

2. | When payment is received :-Bank a/c To Lessee’s a/c | Dr. | 2000 | 2000 | ||

3. | For closing royalty receivable a/c :-Royalty receivable a/c To P/L a/c | Dr. | 1700 | 1700 | ||

Illrd year | ||||||

1. | When royalty is receivable Lessee’s a/cTo Royalty receivable a/c | Dr. | 2000 | 2000 | ||

2. | When payment is received :~ Bank a/cTo Lessee’s a/c | Dr. | 2000 | 2000 | ||

3. | For closing royalty receivable a/c | |||||

Royalty receivable a/c | Dr. | 2000 | ||||

To P/L a/c | 2000 | |||||

IVth year | ||||||

1. | When royalty is receivable :- | |||||

Lessee’s a/c | Dr. | 3900 | ||||

To Royalty receivable a/c | 3900 | |||||

2. | For writing off royalty reserve and receipt of payment of royalty :- | |||||

Bank a/c | Dr. | 2000 | ||||

Royalty reserve a/c | Dr. | 1900 | ||||

To Lessee’s a/c | 3900 | |||||

3. | For closing royalty receivable a/c :- | |||||

Royalty receivable a/c | Dr. | 3900 | ||||

To P/L a/c | 3900 | |||||

Vth year | ||||||

1. | When royalty is receivable :- | |||||

Lessee’s a/c | Dr. | 5000 | ||||

To Royalty receivable a/c | 5000 | |||||

2. | When royalty is received :- | |||||

Bank a/c | Dr. | 5000 | ||||

To Lessee’s a/c | 5000 | |||||

3. | For closing royalty receivable a/c :- | |||||

Royalty receivable a/c | Dr. | 5000 | ||||

To P/L a/c | 5000 | |||||

**Illustration. 18.2 **Minimum rent Rs. 5000 p.a.

Royalty rate 50 paise per ton

Production : 1st year 8000

2nd year 9000

3rd year 10600

4th year 10800

5th year 12000

Short working of any year may be recouped in following 3 years only. Give analytical table, journal entries in the books of Lessee and Lessor.

**Solution :**

Year | Output | Royalty @ 50 paisa | (MR.) | (SW.) | Recoupment | Payment | P/L a/c |

I | 8000 | 4000 | 5000 | 1000 | — | 5000 | — |

II | 9000 | 4500 | 5000 | 500 | — | 5000 | — |

III | 10600 | 5300 | 5000 | — | 300 | 5000 | — |

IV | 10800 | 5400 | 5000 | — | 400 | 5000 | 300 |

V | 12000 | 6000 | 5000 | — | 500 | 5500 | — |

**Journal Entries**

**In the books of lessee.**

s.No. | Particulars | L.F. | Amount Rs. | Amount Rs. | |

1st year :- | |||||

1. | Royalty a/c | Dr. | 4,000 | ||

Short workings a/c | Dr. | 1,000 | |||

To Landlord a/c | 5,000 | ||||

(Being royalties earned and short working to be payable to the landlord) | |||||

2. | Landlord a/c | Dr. | 5,000 | ||

To Cash/Bank a/c | 5,000 | ||||

(Being amount paid to landlord). | |||||

3. | Profit and loss a/c | Dr. | 4,000 | ||

To Royalty a/c | 4,000 | ||||

(Being royalty amount transferred to Profit & loss a/c) | |||||

Il nd year :- | |||||

4. | Royalty a/c | Dr. | 4,500 | ||

Shortworkings a/c | Dr. | 500 | |||

To Landlord a/c | 5,000 | ||||

(Being royalties earned and shortworkings payable to Landlord) | |||||

5. | Landlord a/c | Dr. | 5,000 | ||

To Cash/Bank a/c | 5,000 | ||||

(Being amount paid to landlord) | |||||

6, | Profit and loss a/c | Dr. | 4,500 | ||

To Royalty a/c | 4,500 | ||||

(Being amount transferred to Profit and loss a/c) | |||||

Ill-rd year : – | |||||

7. | Royalty a/c | Dr. | 5,300 | ||

To Landlord a/c | 5,300 | ||||

(Being royalties earned & payable to Landlord) | |||||

8. | Landlord a/c | Dr. | 5,300 | ||

To Bank a/c | 5,000 | ||||

To Short workings a/c | 300 | ||||

(Being amount paid to landlord along with recoupment of short workings of earlier years). | |||||

9. | Profit and loss a/c | Dr. | 5,300 | ||

To Royalty a/c | 5,300 | ||||

(Being transfer of royalties to the Profit and loss a/c) | |||||

IVth year :- | |||||

10. | Royalty a/c | Dr. | 5,400 | ||

To Landlord a/c | 5,400 | ||||

(Being royalties payable to landlord) | |||||

11. | Landlord a/c | Dr. | 5,400 | ||

To Bank a/c | 5,000 | ||||

To Shortworkings a/c(Being recoupment of shortworkings & balance transferred to Landlord) | 400 | ||||

12. | Profit and loss a/c | Dr. | 5,700 | ||

To Royalty a/c | 5,400 | ||||

To Shortworking a/c | 300 | ||||

(Being royalty and unrecouped shortworkings transferred to P/L a/c) | |||||

Vth year :- | |||||

13. | Royalty a/c | Dr. | 6,000 | ||

To Landlord a/c | 6,000 | ||||

(Being royalty payable to landlord) | |||||

14. | Landlord a/c | Dr. | 6,000 | ||

To Bank a/c | 5,500 | ||||

To Shortworkings a/c | 500 | ||||

(Being recoupment of shortworkings and balance paid to Landlord.) | |||||

15. | Profit and loss a/c | Dr. | 6,000 | ||

To Royalty a/c | 6,000 | ||||

(Being amount transferred to P/L a/c) |

**In the books of Lessor (Landlord)**

**Journal entries**

S.No. | Particulars | L.F. | Amount Rs. | Amount Rs. | |

1st year :- | |||||

1. | Lessee’s a/c | Dr. | 5,000 | ||

To Royalty receivable a/c | 4,000 | ||||

To Royalty Reserve/suspense a/c | 1,000 | ||||

(Being the amount of royalty receivable and the difference between minimum rent and royalties receivable transferred to Royalty reserve a/c) | |||||

2. | Bank a/c | Dr. | 5,000 | ||

To Lessee’s a/c | 5,000 | ||||

(Being the amount received from lessee) | |||||

3. | Royalty receivable a/c | Dr. | 4,000 | ||

To Profit & loss a/c | 4,000 | ||||

(Being transfer of royalties receivable to Profit & Loss a/c) | |||||

II nd year :- | |||||

4. | Lessee’s a/c | Dr. | 5,000 | ||

To Royalty receivable a/c | 4,500 | ||||

To Royalty reserve/suspense a/c | 500 | ||||

(Being royalties receivable earned and difference between minimum rent and royalties receivable transferred to Royalty reserve a/c) | |||||

5. | Bank a/c | Dr. | 5,000 | ||

To Lessee | 5,000 | ||||

(Being amount received from lessee) | |||||

6. | Royalties receivable a/c | Dr. | 4,500 | ||

To Profit and loss a/c | 4,500 | ||||

(Being transfer of royalties receivable a/c to Profit & loss a/c) | |||||

III rd year: – | |||||

7. | Lessee’s a/c | Dr. | 5,300 | ||

To Royalty receivable a/c | 5,300 | ||||

(Being royalties earned and receivable) | |||||

8. | Bank a/c | Dr. | 5,000 | ||

Royalty reserve a/c | Dr. | 300 | |||

To Lessee | 5,300 | ||||

(Being royalty received and writing off the amount of royalty reserve) | |||||

9. | Royalty receivable a/c | Dr. | 5,300 | ||

To Profit and loss a/c | 5,300 | ||||

(Being balance of royalty receivable transferred to Profit and loss a/c) | |||||

IVth year :- | |||||

10. | Lessee’s a/c | Dr. | 5,400 | ||

To Royalty receivable a/ c | 5,400 | ||||

(Being royalties earned and receivable) | |||||

11. | Bank a/c | Dr. | 5,000 | ||

Royalty reserve a/c | Dr. | 400 | |||

To Lessee’s a/c | 5,400 | ||||

(Being royalty received and writing off the amount of royalty reserve) | |||||

12. | Royalty receivable a/c | Dr. | 5,400 | ||

Royalty reserve a/c | Dr. | 300 | |||

To profit and loss a/c | 5,700 | ||||

(Being amount transferred to Profit and loss a/c) | |||||

Vth year :- | |||||

13. | Lessee’s a/c | Dr. | 6,000 | ||

To Royalty receivable a/c | 6,000 | ||||

(Being royalty earned and receivable) | |||||

14. | Bank a/c | Dr. | 5,000 | ||

Royalty reserve a/c | Dr. | 500 | |||

To Lessee | 6,000 | ||||

(Being royalty received and writing off the amount of royalty reserve) | |||||

15. | Royalty receivable a/c | Dr. | 6,000 | ||

To Profit and Loss a/c | 6,000 | ||||

(Being amount of royalty receivable transferred to P/L a/c) |

**PRACTICE PROBLEMS**

Pl.SKCo. is lessee of a mine on a royalty of Rs. 1 per ton of coal raised with a minimum rent of Rs. 8,000 per annum with power to recoup S.W. during the first two years of the lease only, The output for the first three years is as follows: 5,000 ton in Year 2013;9,000 ton inYear2014;8,000 ton in Year 2 015. Books are closed each year on31stDecember,Pass the necessary Journal entries in the books of the landlord. Also open SK Co. Account and Royalty Reserve Account.

**P2. **Marshal took a mine on lease for 20 Years. Rate of Royalty is Rs. 1 per ton. Minimum rent is Rs. 8,000 per Year. S.W. of that year will not be recouped in which yield will be less than 4,000 ton and the year in which royalty will be more than minimum rent, only 50% of excess will be used for recoupment of short workings.

Prepare the necessary accounts in the books of lessee when the yield for first four Years respectively is 3,500 ton, 7,000 ton 7,500 ton and 9,000 ton.

**ANSWERS AND HINTS FOR PRACTICE PROBLEMS**

P. No. | Answers & Hints |

1 | Shortworkings transferred to P&L Account in Year 2014 Rs. 2,000 |

2 | Balance in short working account in fourth year Rs. 1,000 |