Royalty accounts

Definition of Royalty

 

Some business which the owner has a right or monopoly towards some goods or services can allow other firms to exercise the right. The owner will get a gratuity based on how far the rights have been exercised.

 

In other words, it is a transaction where by an owner gives a right to other company or user to use his/her own properties, and in return, the user will then give a compensation or payment which is known as royalty.

The main forms of royalty are:

 

a) Mining royalty – to extract mineral and ore from earth

b) The book publisher gives gratuity to the author / writer

c) For the use of a design

 

Royalty agreement

 

A royalty agreement will normally contain clauses dealing with the following:

  1. Minimum rent – guaranteed amount which the landlord, inventor or author is to receive whatever the output maybe.

  2. Royalty per unit per output

  3. Right to recoup short-workings

  4. Right to subject part or whole of tenancy agreement

Minimum Royalty and Short Workings

  • The payment of royalty is based on the unit of output produced. However, if the sum of royalty is less than the minimum rent (if any), then the payment will be based on the minimum rent(minimum royalty – minimum rent).

  • The difference between the royalty and the minimum rent is known as ‘Short Working’. Normally, the tenant may obtain the right to recover the short-workings

    Accounting Entries in the books of lessee

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