1. Royalty Account
The words ‘Royalty’ means ‘payment made to state’. In olden days, land with minerals was owned by the state which was transferred on the basis of some consideration, this consideration was known as Royalty.
A payment made for the use of property, especially a patent, copyrighted work, franchise, or natural resource. The amount is usually a percentage of revenues obtained through its use.

2. Difference Between Rent and Royalty
Payable :- Royalty is payable on the basis of production or amount of sales. Rent is payable on the basis of time as per day, for week, for month etc. Types of Properties :- Royalty is paid for the use of tangible properties such as land as well as intangible properties such as patent, trademark etc. where as Rent is paid only use of tangible property

3. Terminology
Actual Royalty :- this is the amount which is pre-determined on the basis of actual sales / production. It is the income of lessor or landlord and expenses of the lessee. A.R. = (Actual production/sales X Rate of Royalty)

4. Minimum Rent :- This is the minimum amount of Rent which the lessee is required to pay to lessor whether he has derived any benefit or not out of the right or property rented out to him by the lessor. It is the amount below which the landlord never accepts in any year from the person who has to the royalty i.e. from lessee. It is also known as Dead Rent or flat rent.

5. Short-working = the excess of minimum rent over actual royalty achieved is called short working Short-working= Minimum Rent - Actual Royalty

6. Accounting Record in the Books of Lessee
When Royalty is less than Minimum Rent
When Royalty is payable
Royalties A/c Dr.
Short working A/c Dr.
To Landlord A/c
(Being royalty earned and shortworking to be payable to the landlord)
When payment is made
Landlord A/c Dr.
To Bank A/c
(Being amount paid to landlord)
For closing royalty account at the end of the year
P & L A/c Dr.
To Royalties A/c
(being the amount of Royalty transferred to P&L a/c)

7. When Royalty is More than Minimum Rent When Royalty is payable
Royalties A/c Dr.
To Landlord A/c
(Being royalty earned and shortworking to be payable to the landlord)
For writing off shortworking , if any
Landlord A/c Dr.
To Shortworking A/c
(Being recoupment of S.W. if earlier year)
(3) When payment is made
Landlord A/c Dr.
To Bank A/c
(Being amount paid to landlord)
For closing royalty account at the end of the year
P & L A/c Dr.
To Royalties A/c
(being the amount of Royalty transferred to P&L a/c) {{

8. When Royalty is equal to Minimum Rent
When Royalty is payable
Royalties A/c Dr.
To Landlord A/c
(Being royalty earned and shortworking to be payable to the landlord)
(2) When payment is made
Landlord A/c Dr.
To Bank A/c
(Being amount paid to landlord)
For closing royalty account at the end of the year
P & L A/c Dr.
To Royalties A/c
(being the amount of Royalty transferred to P&L a/c)

9. 1. On 1st Jan 1998, The Chitradurg Collieries Ltd
1.     On 1st Jan 1998, The Chitradurg Collieries Ltd. leased a piece of land for a minimum rent of Rs.5,000 in the first year, Rs.10,000 in the second year and thereafter Rs.15,000 per annum, merging into royalty of Rs.2.50 per ton, with power to recoup short-working over the first three years only.  The annual output for the four years ending 31st December 2001 was 500, 3,000, 8,000 and 12,000 tons respectively.
      Show how the accounts would appear in the books of the Colliery Co.
2.     A coal company leased a mine on a royalty of Rs.4 per ton of coal raised with a minimum rent of Rs.15,000 per year.  The right to recoup short-workings was out of the surplus royalties during the first three years only.The quantities of coal raised during the first 4 year were 1,200, 2,000, 6,000 & 10,000 tons respectively. Pass journal entries in the books of Coal Company for the above period.

10. Short working Reserve Account (C.M. Page No. 47 “A took”
It is often mentioned in royalty agreement that shortworking can be recoup in a certain number of years. It is one drawback of this type of treatment that profit and loss account of that year in which there was shortworking , is not affected, but profit and loss account of that year is affected in which it is to be recouped. Therefore removing this defect shortworking reserve account is opened.
for creation of short working reserve
P & L A/c Dr.
To S.W. Reserve A/c
(Being creation of S.W.R. account)
(2) For writing off S.W.
S.W. Reserve A/c Dr.
To P & L A/c
(Being transfer of recouped S.W. to P&L A/c)
(3) In last year of recoupment of S.W. if short working is unrecouped, unrecouped S.W. is transferred to S.W.R. A/c
S.W. Reserve A/c Dr.
To S.W. A/c
(Being transfer of unrecouped S.W.)

11. Accounting Record in the Books of Landlord and royalty reserve
Landlord transferred the excess of minimum rent over royalty to royalty reserve account or royalty suspense account
When Royalty is less than Minimum Rent
When Royalty is receivable
Lessee A/c Dr.
To Royalty Receivable A/c
To Royalty Reserve A/c
(Being the amount of royalties receivable earned and the difference between minimum rent and royalties receivable transferred to Royalty Reserve a/c)
When payment is recevied
Bank A/c Dr.
To Lessee A/c
(Being the amount received from lessee)

12. For closing royalty receivable account
Royalty receivable A/c Dr.
To P & L A/c
(being the amount of Royalty Receivable transferred to P&L a/c)
When Royalty is more than minimum rent
(1) At the time when royalty is receivable
Lessee A/c Dr.
To Royalties Reserve A/c
(Being the amount of royalties receivable earned)
(2) for writing off Royalty Reserve A/c
Royalty Reserve A/c Dr.
To Lessee A/c
(Being Royalty Reserve recouped)
(3) On Receipt of Royalty amount
Bank A/c Dr.
(Being receipt of amount from lessee)

13. (3) For closing Royalty Receivable Account
Royalties Receivable A/c Dr.
To P.&L.A/c
When Royalty Receivable is equal to minimum rent
(1) At the time when royalty is receivable
Lessee A/c Dr.
To Royalties Reserve A/c
(Being the amount of royalties receivable earned)
(2) On Receipt of Royalty amount
Bank A/c Dr.
To Lessee A/c
(Being receipt of amount from lessee)
(3) For closing Royalty Receivable Account

14. Half- yearly payment of Royalty When royalty is payable half- yearly, minimum rent should also be calculated for half-yearly in order to compare it with royalty for finding out short working or surplus. Royalty is transferred to profit and loss account not at end of half year but at the end of the year. Practical Question Course manual Page No. 47 “ Mohan took a mine”

15. Less work or not work due to strike
When work is less in any year due to strike, following type of agreement may take place between the lessee and the landlord
Actual Royalties earned for the year will discharged all rental obligation in the year of strike. Actual Royalties will be treated as minimum rent and there will neither be any short working nor excess in that year
The minimum rent is to be recharged as having been reduced proportionately having regard to the length of the stoppage of work due to strike
Practical Question
Course manual Page No. 47 “ The Assam coal company “
Course manual Page No. 48 “ The Binnie colliery company”, “Mohan took”, “New Colliery Company”

16. Capital and Revenue Receipts, Payments, Profits and Losses:
Contents: Capitalized and Revenue Receipts Capital and Revenue Payments Capital and Revenue Profits Capital and Revenue Losses

17. Capitalized and Revenue Receipts
Receipts refer to the actual amounts of cash received. They can be either of capital nature or revenue nature.
Capital receipts include the following:
Capital brought in by the proprietor at the commencement and any additions made subsequently.
Money borrowed from partners, bankers, private individuals etc.
Money received by the sale of fixed assets.
Money received on account of capital profit.

18. Revenue receipts include the following:
Money received by the sale of floating assets - by sale of goods.
Money received on account of some revenue profit.

19. Capital and Revenue Payments:
Capital payment- it is an amount paid on account of some capital expenditure
Revenue payment – it is an amount actually paid on account of some revenue expenditure. Expenditure is the full amount incurred whether paid or not, whilst payments refer to the amount actually paid.
Example:
If a building is purchased for Rs. 20,000 from X and Rs. 10,000 is paid in cash and the remaining sum to be paid after six months; Rs. 20,000 is capital expenditure, but Rs. 10,000 is only capital payment. Similarly if goods are purchased from X for 30,000 and Rs. 15,000 is paid in cash; Rs. 30,000 is revenue expenditure but only Rs. 15,000 is revenue payment.

20. Capital and Revenue Profits:
Capital profit means a profit made on the sale of a fixed asset or profit earned on raising monies for the business. For example a building purchased for Rs. 20,000 is sold for Rs. 25,000 the profit Rs. 5,000 thus made is a capital profit.
Revenue profit on the other hand is a profit made by the business e.g., profit on the sale of goods, income from investments, commission earned etc.

21. Differences Between Capital Profit And Revenue Profit
Mode Of Earning
Capital profit is earned by selling assets, shares and debentures at a price more than their book value and face value. Revenue profit is earned in the ordinary course of the business.
Distribution Capital profit is not available for the distribution to shareholders as dividend. Revenue profit is available for the distribution to shareholders as dividend.
Use Capital profit is transferred to capital reserve and used for meeting capital losses. Revenue profit is used to distribute dividend and create reserve and fund for various purposes.
Treatment Capital profit is shown on the liabilities side of the balance sheet as capital reserve. Revenue profit is shown as debit balance on the debit side of the trading and profit and loss accounts and on asset side of the balance sheet as accumulated loss.

22. Capital and Revenue Losses:
Capital loss means a loss made on the sale of a fixed asset or a loss incurred in connection with the raising of money for business. Capital loss may be shown as an asset in the balance sheet. But as this asset is a fictitious nature, it would advisable to write off it.
Revenue loss, on the other hand, is the loss incurred in trading operations such as loss on the sale of goods. Revenue losses are charged to profit and loss account of the year in which they occur.

23. What are revenue expenditures which are treated as capital expenditure?
Wages – in general the item “wages” is treated as revenue expenditure but in certain condition it is not treated as revenue. For example, wages paid to erect a new machine has to be added to the cost of the new machine, thereby treating it as a capital expenditure. Like that wages paid workers associated with construction activities like have to be added to the respective assets and they have to treated as capital expenditure. Transport – Cost of transport i.e. delivery of a machine (new or second hand) to the business premises is to treated as capital expenditure. Raw material and stores – Consumed in the manufacture of fixed assets in construction business also have to be treated as capital expenditure.

24. Development Expenses –
Legal Expenses –
Incurred are also a Capital Expenditure.
Repairs –
Generally and in normal course they are of revenue nature. But when the second hand machinery is made operative for the first time, repair is a capital expenditure under such occasion
Development Expenses –
Generally and in normal course they are of revenue nature. But in certain area of operations, a lot has to be spent in order to bring them into productive stages. For example, all plantation unit (coffee, tea, rubber) and mining. Such heavy expenses incurred heavily at the initial stage are to be treated as capital expenditure.
Interest of Capital –
Depending on the amount that was spent and the yield or benefit that we get from the amount spent is the basis for determining the type of expenditure whether it is capital or revenue.

25. Rs. 7,500 spent for addition to the existing machinery.
It is capital expenditure because it would increase the earning capacity
Rs. 5,000 incurred on transport cost in delivering a new machine to the business site.
It is capital expenditure because Transport cost forms part of that fixed assets.
Rs. 500 paid for wages to install that new machine.
it is capital expenditure because wages are paid to put the assets into use.
An old machine of book value Rs. 1, 5000 (is of no more use) has become obsolete, removed at a cost of Rs. 1,000 and its scrape realized at Rs.800.
it is capital receipts of Rs. 800 and Rs 1,000 is revenue expenditure because it is paid for dismantle it.
A second hand machine was purchased for Rs. 9,000 and spent Rs. 1,000 for repairs to make it usable immediately.
it is capital expenditure because any sum spent to make the fixed assets ready to use is of capital nature..