ROYALTY ACCOUNTING -PPT.pptx

Recoupment of Short-workings
The right of Recoupment means the right given to the lessee by the lessor to carry-forward and set-off the short-workings from the surplus of royalties over the Minimum Rent. It can be of two types:

Fixed Right of Recoupment: When the lessor allows the lessee to adjust the short-workings only for a fixed period of time, it is known as Fixed Right of Recoupment.

1. ROYALTY ACCOUNTING Dr. A. HELDA MARY

2. In terms of accounting, royalty is what a lessee pays to a lessor for the use of any rights, copyrights, franchises or any such asset. It is the system of sharing of revenues between the lessee and the lessor. Let us learn more about the special accounting treatments in royalty accounts.

3. Royalty and Related Terminologies Lease: It is an agreement where a person acquires a right to use an asset for a certain period of time from another person or the owner of the asset in return for a payment. The owner is known as the Lessor. The user is the Lessee. The amount paid is Royalties   For Example, A has developed a machine that uses less material for production. He also got it patented. Now, B wants to use it. B will have to pay a royalty to A for using the machine. Here, A is the lessor and B is the Lessor.

4. Accounting Treatment of Royalties: For the lessee, royalties are an ordinary business expenditure. Royalty paid on the basis of output is debited to Trading or Manufacturing A/c. Whereas, the royalty paid on the basis of sales is debited to Profit & Loss A/c.

5. Minimum Rent or Fixed Rent: It is the amount that has to be paid by the lessee to the lessor whether or not he has derived benefit from the asset. Hence, it is also called Dead Rent or Rock Rent. Minimum rent can be a fixed sum for every year or may change every year as per the terms of the agreement.   When the actual royalty for a year is less than the minimum rent, the lessee will pay the minimum rent to the lessor. When the actual royalty for a year is more than the minimum rent, the lessee will pay the actual royalty to the lessor.

6. Short-workings: It is the excess of Minimum Rent over the Actual Royalty payable. It is calculated only when it is allowed to be adjusted against the future royalties by the lessor. Short-workings = Minimum Rent – Actual Royalty

7. Recoupment of Short-workings: The right of Recoupment means the right given to the lessee by the lessor to carry-forward and set-off the short-workings from the surplus of royalties over the Minimum Rent. It can be of two types:   Fixed Right of Recoupment: When the lessor allows the lessee to adjust the short-workings only for a fixed period of time, it is known as Fixed Right of Recoupment.

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