Balance Sheet Accounts for Royalty Accounting
Royalty Advances – This account holds the advances against future royalties. The royalty advance balance is reduced as advances are deducted against royalty earnings.
Royalty Advance Reserve – 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.
Unearned Royalties Reserve – 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 – Is the royalties that the company expects to pay out. It does not statements with a negative balance (i.e. unearned royalties).
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)
If you have any questions or comments about royalty accounting please feel free to email edwin@kensai.net or visit our website www.easyroyaltiesusa.com
