Meaning
Royalty is an amount paid by the lessee (user) to the lessor (owner) for using rights such as land, mines, patents, copyrights, trademarks, or technical know-how. When royalty is subject to a minimum rent condition, the lessee must pay at least the minimum amount even if actual royalty is lower.
This question requires journal entries under two situations:
- (a) When no Minimum Rent Account exists
- (b) When Minimum Rent Account exists
(A) Journal Entries When No Minimum Rent Account Exists
Here, the minimum rent is adjusted through Shortworkings Account directly without opening a separate minimum rent ledger.
Journal Entries in the Books of the Lessee
| Transaction | Journal Entry (Lessee) |
|---|---|
| For actual royalty due | Royalty A/c Dr. → To Lessor A/c |
| When Minimum Rent exceeds Actual Royalty → Shortworkings arise | Shortworkings A/c Dr. → To Lessor A/c |
| Payment made to lessor | Lessor A/c Dr. → To Cash/Bank A/c |
| Recoupment of Shortworkings | Lessor A/c Dr. → To Shortworkings A/c |
Journal Entries in the Books of the Lessor
| Transaction | Journal Entry (Lessor) |
|---|---|
| Royalty Receivable | Lessee A/c Dr. → To Royalty A/c |
| Shortworkings Allowed | Lessee A/c Dr. → To Shortworkings A/c |
| Cash received | Cash/Bank A/c Dr. → To Lessee A/c |
| Shortworkings Recouped | Shortworkings A/c Dr. → To Lessee A/c |
(B) Journal Entries When Minimum Rent Account Exists
In this method, Minimum Rent Account is maintained separately. Royalty, Minimum Rent and Shortworkings are recorded distinctly.
Journal Entries in the Books of the Lessee
| Transaction | Journal Entry (Lessee) |
|---|---|
| For actual royalty due | Royalty A/c Dr. → To Lessor A/c |
| Minimum rent obligation recorded | Minimum Rent A/c Dr. → To Lessor A/c |
| If Minimum Rent > Royalty → Shortworkings | Shortworkings A/c Dr. → To Minimum Rent A/c |
| If Royalty > Minimum Rent → Surplus | Royalty A/c Dr. → To Minimum Rent A/c |
| Payment to lessor | Lessor A/c Dr. → To Cash/Bank A/c |
| Recoupment of Shortworkings | Lessor A/c Dr. → To Shortworkings A/c |
Journal Entries in the Books of the Lessor
| Transaction | Journal Entry (Lessor) |
|---|---|
| Minimum rent receivable | Lessee A/c Dr. → To Minimum Rent A/c |
| Actual royalty received | Lessee A/c Dr. → To Royalty A/c |
| Shortworkings recorded | Shortworkings A/c Dr. → To Lessee A/c |
| Cash received | Cash/Bank A/c Dr. → To Lessee A/c |
| Recoupment of Shortworkings | Lessee A/c Dr. → To Shortworkings A/c |
Conclusion
Royalty accounting requires careful treatment of Minimum Rent and Shortworkings. When no Minimum Rent Account exists, all adjustments pass through Shortworkings directly. But when a Minimum Rent Account is opened, all components—Royalty, Minimum Rent and Shortworkings—are recorded separately, giving greater clarity and accuracy. These journal entries ensure transparency between the lessor and lessee.