Financial accounting- 2

Chapter-1 Royalty a/c

Main least – entries & ledger a/c‘s in the books of lessee & lesser

Chapter-2 Royalty a/c- sub –lease entries

Ledger a/c in the books of original lesser, sub lesser & sub lessee

Chapter-3 Branch a/c

Dependent branches (including higher invoice)

Problems on debtors method & stock & debtors method

Chapter-4 Branch a/c

Independent branches- incorporation entries- preparation of columnar trading &

p & l a/c. Consolidated b/s in the books of head office

Chapter-5 Departmental a/c

Chapter-6 Issue of shares

Pro- rata allotment- forfeiture & re- issue of shares.

 Royalty a/c
Royalty is a payment made by the user of a property to the property for having
user of the property to generate income. Royalty is a periodical payment
generally made at the end of a financial year. Payment of royalty arises out of an
agreement b/w 2 parties. The parties to royalty agreement are:

1.The owner

2.The user.

The owner of the property is called a lesser, an author, landlord or a license

holder. The user of a property is called a lessee, tenant, publisher, licensee… & so
on.

Royalty is a nominal a/c for the user is expenditure & hence is debited in his
books. For the owner it is a income & Is credited. It is desirable to be familiar with
the following terms in relation to the royalty agreement.

1.Minimum Rent: It is the minimum amount which the user of the property has to
pay to the owner of the property, when the actual royalty amount is less in the
initial stage. The minimum rent clause is included in the royalty agreement in
order to protect the interest of the owner or lesser.

2. Short Working: It refers to the excess of minimum rent over the actual royalty
raised. In simple terms short working is different b/w the actual rent & the
minimum rent.

3. Recoupment of short working: This clause is incorporated in the royalty

agreement to protect the interest of the user of the property. Recoupment of
short working is raised to recover the short working out of surplus over minimum
rent during the subsequent year by the lessee or the user.

The right of recoupment may be fixed or fluctuated. When the right of

recoupment is fixed, it is recoverable within a certain period of time. In case of
fluctuating right it is recoverable during the period subsequent to the year in
Which short working occurs.

Accounting procedure:

1.In the books lessee or tenant

A) When the royalty amount is due:

Royalty a/c Dr

To Lesser a/c

B) When the royalty is actually paid:

Lesser a/c Dr

To cash a/c

(Being the royalty due paid)

C) Production or p & l a/c Dr

To royalty a/c

(Closing royalty at the end of the year)

D) In the year when there is short working the first entry is to be changed as
follows:

Royalty a/c Dr (with the actual amount of royalty)

Short workings a/c Dr (with the amount of S.W)

To lesser a/c
E) In any year where there is the recoupment of S.W, 2nd journal entry will be as
follows:

Lesser a/c Dr (with the actual royalty amount due)

To S.W a/c (S.W recoup)

To cash a/c (actual cash paid)

Journal entries when the minimum rent a/c re- opened. In some case the
minimum rent a/c is opened during the period. When there the S.W in such case
the following:

1) Minimum rent a/c Dr

To lesser a/c

2) Royalty a/c Dr

S.W a/c Dr

To M.R a/c

3) Lesser a/c Dr

To cash a/c

4) Production or p & l a/c Dr

To royalty a/c
Problems
1) Concept collieries took a mine on lease from Sunshine ltd. The lease
agreement provided at the rate of 50ps/ ton of coal raised, subject to a M.R
of Rs.17000p.a. The agreement also provided that S.W resulting in any
could be recoup during the 3 subsequent yrs. Particulars regarding
production are as follows:

Year Production in ton

2000 4000
2001 28000
2002 30000
2003 46000
2004 40000
2005 50000

Pass the journal entries & write off ledger a/c in the books of concept
collieries. When,
A. The M.R a/c is not opened
B. The M.R a/c is opened.

Solution...

A. When the M.R is not opened.

In the books of concept collieries.

Year Production Actual M.R S.W Amt

in ton royalty paid
Resulted Recoup Transferre
d
2000 4000 2000 17000 15000 _ _ 17000
2001 28000 14000 17000 3000 _ _ 17000
2002 30000 15000 17000 2000 _ _ 17000
2003 46000 23000 17000 _ 6000 9000 17000
 2004 40000 20000 17000 _ 3000 _ 17000
2005 50000 25000 17000 _ 2000 _ 23000
Journal entries

Date Particulars L/ Dr Cr
F
2000 Royalty a/c Dr 2000
S.W a/c Dr 15000
To Sunshine ltd a/c 17000
Sunshine ltd a/c Dr
2000
To cash a/c
17000
17000
P & L a/c Dr 2000
2000 To royalty a/c 2000
Royalty a/c Dr
2001 S.W a/c Dr 14000
To Sunshine ltd a/c 3000
17000

Sunshine ltd a/c Dr 17000

2001 To cash a/c 17000

P & L a/c Dr
2001 To royalty a/c 14000
14000
Royalty a/c Dr
2002 S,W a/c Dr 15000
To Sunshine ltd a/c 2000
17000
2002 Sunshine ltd a/c Dr 17000
To cash a/c 17000
P & L a/c Dr
2002 15000
To royalty a/c
15000
Date Particulars L/F Dr Cr
2003 Royalty a/c Dr 23000
To Sunshine ltd 23000

2003 Sunshine ltd a/c Dr 23000

To S.W a/c 6000
To Cash a/c 17000

2003 P & L a/c Dr 9000

To S.W a/c 9000
23000
2003 P & L a/c Dr 23000
To royalty a/c
20000
Royalty a/c Dr
2004 20000
To Sunshine ltd

2004 Sunshine ltd a/c Dr 20000

To S.W a/c 3000
To Cash a/c 17000
P & L a/c Dr 20000
2004 To royalty a/c 20000

2005 Royalty a/c Dr 25000

To Sunshine ltd a/c 25000
2005 Sunshine ltd a/c Dr 25000
To S.W a/c 2000
To Cash a/c 23000
 P & L a/c Dr 25000
2005 To royalty a/c 25000