PRESENTED BY :-

NANDINI VERMA , SHABNAM SULTANA BEGUM

& PRIYA DAS
B.COM 2nd SEMESTER
1. INTRODUCTION TO ROYALTY
2. TYPES OF ROYALTY

3. ACCOUNTING ENTRIES IN CASE

OF ROYALTY
4. IMPORTANT TERMS OF ROYALTY

5. SUB-LEASE
 According to English oxford dictionary , the term royalty means
“an amount of money that is paid to the person who wrote a
book , piece of music , etc. every time his/her work is sold or
performed .”
A payment made for the use of property , especially a patent ,
copyrighted work , franchise , or natural resources . The amount is
usually a percentage of revenues obtained through its use .

1. LESSOR ( LANLORD ) : The person who receives the royalty is

known as lessor .

2. LESSEE (TENANT) : The person who pays the royalty is

known as lessee .
1. MINING ROYALTY
2. PATENT ROYALTY
3. COPYRIGHT ROYALTY
SITUATION 1
WHEN THE LEASE AGREEMENT DOES NOT PROVIDE FOR
PAYMENT OF MINIMUM RENT
(A) ENTRIES IN THE BOOKS OF LESSEE:
(I) When royalty becomes due :

Royalty A/C Dr.

To landlord A/C
(II) When the payment is made to the landlord :

landlord A/C Dr.

To bank A/C
(III) When the balance of royalty A/C is closed:

statement of profit and loss Dr.

To royalty A/C
(B) ENTRIES IN THE BOOKS OF LESSOR:
(I) When royalty becomes due :
lessee a/c Dr.
to royalty a/c

(II) when the payment is made to the landlord:

bank a/c Dr.
to lessee a/c

(III) When the balance of royalty a/c is closed :

royalty a/c Dr.
to profit & loss a/c
SITUATION – 2
WHERE THE LEASE AGREEMENT PROVIDES FOR PAYMENT OF
MINIMUM RENT , WHEN THE ROYALTY IS LESS THAN THE
MINIMUM RENT & MINIMUM RENT A/C IS NOT REQUIRED
TO BE OPENED AND SHORTWORKING IS NOT RECOUPABLE

(A) ENTRIES IN THE BOOKS OF LESSEE:

(a) when royalty is less than minimum rent:
royalty a/c dr.
short-working a/c dr.
to lessor a/c
(b) When royalty is more than the minimum rent:
royalty a/c dr.
to landlord a/c
(c) When payment is made to landlord :
landlord a/c dr.
to bank a/c
(d) When short -working (being irrecoverable) transferred to
p & l a/c:
profit & loss a/c dr.
to short-working a/c
(e) For transferring/closing royalty a/c:
profit & loss a/c dr.
to royalty a/c
(B) ENTRIES IN THE BOOKS OF LESSOR:
(a) when royalty is less than minimum rent :
lessee a/c dr.
to royalty a/c
to royalty suspense a/c
(b) when royalty is equal to or more than the
minimum rent :
lessee a/c dr.
to royalty a/c
(c) for receipt of money from the lessee :
bank a/c dr.
to lessee a/c
(d) When short-working not recoupable is transferred
to profit & loss a/c :
royalty suspense a/c dr.
to profit & loss a/c

(e) for transferring / closing royalty a/c :

royalty a/c dr.
to profit & loss a/c
SITUATION – 3
WHERE THE LEASE AGREEMENT PROVIDES FOR PAYMENT OF
MINIMUM RENT AND MINIMUM RENT A/C IS NOT
REQUIRED TO BE OPENED AND SHORTWORKING IS
RECOUPABLE IN FUTURE OUT OF EXCESS OF ROYALTY
OVER MINIMUM RENT.

(A)ENTRIES IN THE BOOKS OF LESSEE:

(1) when royalty is less than minimum rent and short-workings
are recoupable :
royalty a/c dr.
short-working a/c dr.
to lessor a/c
(2) when the minimum rent is paid :
lessor a/c dr.
to bank a/c
(3)when the royalty a/c is closed:
profit & loss a/c dr.
to royalty a/c
(4) For transfer of short-working:
no entry is to be passed since the lessee has the right
of recoupment of short-working . It will be carried
forward till the expiry of the period of recoupment .
(5) In subsequent years when actual royalty exceeds the
minimum rent :
(a) when royalty arises :
royalty a/c dr.
to lessor a/c
(b) when short-working is recovered :
lessor a/c dr.
to short-working
(c) When royalty is paid :
lessor a/c dr.
to bank a/c
(d) When the royalty a/c is closed :

profit & loss a/c dr.

to royalty a/c

(e) If the period of recoupment of short-working lapses:

profit & loss a/c dr.
to short-working a/c
(B) ENTRIES IN THE BOOKS OF THE LESSOR:
(a) when the actual royalty is less than the
minimum rent:
lessee a/c dr.
to royalty a/c
to royalty suspense a/c
(b) when minimum rent is received :
bank a/c dr.
to lessee a/c
(c) when royalty a/c is closed :
royalty a/c dr.
to profit & loss a/c
(d) For transfer of short-workings :
no entry will be passed until the expiry of the
period of recoupment since the lessee has the right of
recoupment of short-workings .
(e) In subsequent years , when actual royalty exceeds
minimum rent :
(i) when royalty arises :
lessee a/c dr.
to royalty a/c
(ii) when short-working is recouped :
royalty suspense a/c dr.
to lessee a/c
(iii) When royalty is received :
bank a/c dr.
to lessee a/c
(iv) When royalty a/c is closed :
royalty a/c dr.
to profit & loss a/c

(f) For transfer of lapsed amount of short-working :

royalty suspense a/c dr.
to profit & loss a/c
SITUATION – 4
WHERE THE LEASE AGREEMENT PROVIDES FOR PAYMENT OF
MINIMUM RENT AND MINIMUM RENT A/C IS REQUIRED TO BE
OPENED AND SHORT-WORKING IS RECOUPABLE IN FUTURE
OUT OF EXCESS OF ROYALTY OVER MINIMUM RENT .

(A) ENTRIES IN THE BOOKS OF LESSEE :

(1) when actual royalty is less than the minimum
rent: minimum rent a/c dr.
to lessor a/c
(2) when the minimum rent a/c is transferred :
royalty a/c dr.
short-working a/c
to minimum rent a/c
(3) When the amount is paid to the lessor :
lessor a/c dr.
to bank a/c
(4) when the royalty a/c is closed :
profit & loss a/c dr.
to royalty a/c
(5) for transfer of short-workings :
no entry is to be passed since the lessee has the
right of recoupment of short-workings till the expiry
of the period specified in the agreement.
(6) In subsequent years , when the actual royalty exceeds the
minimum rent :
(i) when royalty is due :
royalty a/c dr.
to lessor a/c
(ii) when short-working is recouped :
lessor a/c dr.
to short-working a/c
(iii) when the amount due is paid to the lessor :
lessor a/c dr.
to bank a/c
(iv) when the royalty a/c is closed :
profit & loss a/c dr.
to royalty a/c
(7) If the period of recoupment of short-working expires :
profit & loss a/c dr.
to short-working a/c
MINIMUM RENT :
The minimum amount which is payable
periodically by the lessee to the lessor is known
as ‘minimum rent ‘ or ‘ dead rent ‘.

For example – the lease agreement may provide

for payment of minimum rent of Rs. 6000 in the
1st year , Rs. 8000 in the 2nd year and Rs.10,000 in
subsequent years . This means that the minimum
rent is variable. If the lease agreement provides
for payment of, say Rs. 10,000 every year as
minimum rent , it will mean that the minimum
rent is not variable i.e. fixed .
SHORTWORKING :The excess of minimum rent
over actual royalty is known as short-working .

MANNER OF RECOUPMENT SHORTWORKING

The right of recoupment of short-working , if any , may
take either of the following :

1. FIXED
2. FLOATING
Sub-lease is an under lease or lease by a lessee to
another. A lessee gets a lease right of a property
from the landlord. When the lessee himself grants
lease of that property to another person , it is called
sub-lease .

For example – suppose X has taken a property on

lease from Y. Thereafter X has given that property on
lease to Z . This second lease taken by Z is called
sub-lease . In this case X has subleased the property
to Z . Thus lease of leased property is called
‘sub-lease’.