Balance Sheet Accounts

Royalty Accounting Balance Sheet Accounts

Royalties Receivable – This reflects the amount due to the company from licensees (rights buyers) of your intellectual property.

Royalty Advances – This account holds the advances against future royalties. The royalty advance balance is reduced as advances are deducted against royalty earnings.

Allowance for Uncollectible Advances – The royalty advance reserve account is an allowance for royalty advances that will not be earned out due to the project being canceled, authors not submitting the manuscript, or earned royalties not fully covering the royalty advance.

Unearned Royalties – This account contains royalty statements balances where the royalty recipient owes the publisher money – i.e. royalty earnings were negative.

Allowance for Uncollectible Royalties – The reserve account reduces the net amount of unearned royalties (unearned royalties + unearned royalties reserve) to the amount that the publisher expects to collect from the royalty recipients. In many cases the amount of the reserve is equal to the balance of the unearned royalties.

Royalties Payable - These payables are the royalties that the company expects to pay out. It excludes statements with a negative balance (i.e. unearned royalties).

Example:

Asset Accounts

10200 Royalties Receivable (consolidated account)

  • 10210 Royalties Receivable (based on actual sales reports submitted by licensees)
  •  10220 Accrued Royalties Receivable (based on forecasted sales reports submitted by licensees)

10500 Royalty Advances (consolidated account)

  • 10510 Royalty Advances
  • 10520 Allowance for Uncollectible Advances (contra-account)

10600 Unearned Royalties (consolidated account)

  • 10610 Unearned Royalties
  • 10620 Allowance for Uncollectible Royalties (contra-account)

Liability Accounts

  • 20100 Royalties Payable
  • 20200 Royalty Reserves Payable

Why Separate Royalties Payable from Unearned Royalties?

Many royalty system reports combine royalties payable and unearned royalties (i.e. statements with a negative earnings balance) into a single net amount. Why does one separate out unearned royalties from royalties payable?

Two reasons. First, to comply with GAAP (Generally Accepted Accounting Principles). Second, you want to show how much you need to pay to royalty recipients. Including unearned royalties in royalties payable understates the value of the liability for future payments.

See the examples below.

Example 1 lumps unearned royalties and royalties payable together and shows a net payable amount of $200,000.

Example 2 reports unearned royalties separately from royalties payable and shows the true liability – $240,000.

Example 1 (Incorrect )

Current Liabilities

— Royalties Payable ($200,000)

Example 2 (Correct)

Other Assets:

— Unearned Royalties $40,000

Current Liabilities:

— Royalties Payable: ($240,000)

Why Create a Separate Payables Account for Royalties Payable?

Companies with large royalty expenses; such as book and music publishers, often use a dedicated general ledger account for royalties payable. This facilitates the creation of separate accounts payable aging report for trade payables and royalties. Trade payables (for rent and operating expenses) are usually paid within 60 days. Royalties payable are usually paid quarterly, semi-annually or annually.

A dedicated royalties payable account also allows financial statements to present the balance of each account to management.

Example 1: One general ledger account for all payables

  • 20000 – Accounts Payable $300,000

Example 2: Separate account for Royalties Payable

  • 20000 – Accounts Payable $100,000
  • 20100 – Royalties Payable $200,000

Questions?

If you have any questions or comments about royalty accounting please feel free to contact Edwin Fager via email at edwin@kensai.net .