Royalty Accounting

Royalty Accounting
Royalty accounting means when the owner of a long-term asset (patent or copyright) can issue a licensee to another party allowing then to use the asset in return for payments referred to as royalties, the royalties recorded in debt as Advance on royalties, and in credit as Cash.

Example

The owner of the brand such as for example a trademark or copyright can authorize a license to another party (licensee) to use the asset in return for payments referred to royalties and they typically pertain of a percentage of the revenues brought in by the asset. The details of a royalty accounting agreement presented in a contract dictate how royalties are calculated. Royalties can be calculated differently depends on the type of the form can calculation be complex, however, essentially they depend on the amount to which the asset is used by the licensee.

Types of Royalty Accounting Calculations

The different types of calculations are gross revenue, price per unit and minimum rent. Some agreements call for the licensee to pay the licensor a fixed percentage of Gross Revenues. Example, a landowner might lease a property to a minor, who pays a fixed percentage of the profit she makes from gold she finds on that land. Other arrangements with different calculation might be when it is a fixed percentage of Net Revenues after definite outlays. For example, the minor might reduce the costs of equipment maintenance from the value of the gold she finds and then pays a percentage of the lower amount. Another type of calculation called Price Per Unit which means a fixed percentage of profit per unit of the asset sold. For example, a publisher might pay a royalty to an author for each copy of their book sold. The last one which is called Minimum Rent has variable payments that assure the licensor some amount of profit. The Licensee pay the greater of a royalty payment or a fixed sum payment, recognized as minimum rent.

Minimum rent is also known as dead rent or flat rent. A minimum sum guaranteed to the licensor by the licensee in order to make the licensor receive a minimum amount in any particular period, whether it comes with benefit or not, out of the right is known as minimum rent.
There are different types of royalties:

  • Copyright — provides a legal right to the licensor. Copyright royalty is payable by the licensee to the licensor based on the contract.
  • Mining Royalty — licensee of a mine or quarry pays a royalty to the licensor of the mine or quarry.
  • Patent Royalty — is paid by the licensee to licensor on the basis of output or production of the respective goods or services.
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