Last Updated On -08 Jul 2025
In business, it's normal for people or firms to use other people's intellectual property or resources. These deals generally entail a royalty, which is a periodical payment made by one party (the user) to another (the owner) for utilizing their asset. For example, using land for mining, publishing a blockbuster novel, or making a patented design. Accountants utilize a separate ledger called the Royalty Account to keep track of these kinds of transactions. This blog talks about what royalty accounts are, the many varieties, how to make diary entries, and why they are important in real life.
A royalty is a payment made by one party (the lessee or licensee) to another (the lessor or licensor) for the right to use an asset, which is usually intellectual property, natural resources, trademarks, or patents. These payments are usually made on a regular basis and are based on output, sales, or use.
Here are some examples of royalty agreements:
A Royalty Account is a book that keeps track of all transactions that have to do with royalty revenue or expenses. It helps keep track of the amount owed, any minimum guaranteed amounts (if any), shortworkings, and actual payments.
Three main stakeholders are frequently involved in royalty transactions:
Royalty accounting has two parts:
The royalty transactions are usually recorded in the following manner:
For the Licensee (User/Lessee)
Royalty Account Dr. To landlord’s account |
Shortworkings Account Dr. To Landlord's account |
Landlord’s account Dr. To Bank/Cash account |
Landlord’s Account Dr. To Shortworkings Account |
For the Landlord (Owner)
Bank/Cash Account Dr. To Lessee’s Account |
If you work in an industry where intellectual property, natural resources, or usage rights are involved, the Royalty Account is an important aspect of your accounting. Royalty agreements for publishing, mining, software, or licensing a brand name need thorough accounting to make sure that everything is clear, fair, and in line with the terms of the deal. Students and professionals who understand this topic will be able to handle complicated contracts and journal entries with ease.
This is the least amount of money that is guaranteed, even if the real royalty (based on sales or output) is smaller. The user has to pay this minimum amount so that the owner will always have money coming in.
Shortworkings are the difference between the actual royalty and the minimum rent. If output or sales go over the minimum level in the future, this money may be paid back.
Shortworkings can be changed in the future if the royalty is more than the minimum rent in some agreements. This benefit normally only lasts for a certain amount of time (2–3 years).
If the licensee doesn't get the shortworking back within the time limit, it becomes a permanent loss.
For example: Royalty on Mining Coal
If a mining business rents land from the government, it commits to: Pay ₹50 per ton of coal mined,
Output during the first year: 1,500 tons x ₹50 = ₹75,000
Since the actual royalty is less than the required rent (₹1,00,000), Shortworking is ₹25,000.
Royalty transactions In books:
If the royalty goes over ₹1,00,000 in the next two years, the corporation can get back the ₹25,000 it didn't earn, as long as the agreement allows it.
Did you know? The idea of royalty goes back a long way. The name "royalty" comes from the money that was paid to kings and queens for giving people the right to exploit valuable minerals or use specified regions. Governments still get royalties from mining companies that take resources from the country. |
Looking for the right guidance? Don't worry our daily Commerce Concepts have got you!
It depends on the party:
The licensee must still pay the required amount of rent, even if there is no production, if the agreement has a minimum rent clause. However, there may be exceptions listed in the contract.
Yes. In most places, the person who gets the royalty money has to pay taxes on it. Under some tax laws, the payer may be able to deduct the royalty they paid as a business expense.