Accounting Treatment in Books of Lessor

A lease is an agreement where a person acquires a right to use an asset for a certain period of time from another person or the owner of the asset in return for a payment. The owner is the Lessor. The user is the Lessee. The amount paid is Royalty.

Accounting Treatment in books of Lessor

Royalty is the sum payable by the lessee to the lessor for the use of rights vested in the lessor. It is a periodic payment. It is generally paid on the basis of output or sale. Royalty is paid for extraction of mines, for use of a patent, for use of technical know-how, to an author for sale of his books, etc.

For the lessor, royalty is ordinary business income. Royalty received on the basis of output is credited to Trading or Manufacturing A/c. Whereas, royalty received on the basis of sales is credited to Profit & Loss A/c.

Minimum Rent is the amount that has to be paid by the lessee to the lessor whether or not he has derived benefit from the asset. Hence, it is also called Dead Rent or Rock Rent.

Lessor may allow the lessee the right to recoupment of short-workings. In this case, the lessor will receive only the minimum rent until the period of recoupment. The entries below are done assuming that the lessor has allowed right of recoupment to the lessee.

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• Royalty and related Terminologies
• Accounting Treatment in Books of Lessee

Journal Entries in the books of the Lessor

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. For Royalty due	Lessee’s A/c (Minimum Rent)	Dr.	xx
	To Royalty receivable A/c (Actual Royalty)			xx
	To Short-workings Allowable A/c			xx
	(Being royalty due from the lessee and short-workings allowed)
2. For payment received	Bank A/c	Dr.	xx
	To Lessee’s A/c			xx
	(Being money received from the lessee)
3. When short-workings are recouped	Short-workings Allowable A/c	Dr.	xx
	To Lessee A/c			xx
	(Being amount of short-workings recouped)
4. For irrecoverable short-workings	Short-workings Allowable A/c	Dr.	xx
	To Profit and Loss A/c			xx
	(Being the amount of short-workings lapsed)
5. For transferring Royalty at the year end	Royalty receivable A/c	Dr.	xx
	To Trading/ P&L /Manufacturing A/c			xx
	(Being royalty received transferred to the Trading/ P&L /Manufacturing A/c at end of the year)

Solved Example for You

Q: X Ltd. took a right to publish and sell a book from Bharat for 5 years. The minimum rent is ₹20000. Royalty is ₹5 per book. Bharat has allowed a right to recoup the short-workings to the X Ltd. in the first 4 years. The sales in the 5 years are:

Year	Books sold
1	2500
2	3000
3	4500
4	5000
5	6000

Calculate the Royalty payable and short-workings. Also, pass the necessary journal entries in the books of Bharat for 5 years. You are also required to prepare the account of X Ltd. The books are closed on 31^st March every year.

Ans: In the books of Bharat

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1st Year
31st Mar	X Ltd’s A/c	Dr.	20000
	To Royalty receivable A/c			12500
	To Short-workings Allowable A/c			7500
	(Being royalty due from X Ltd. and short-workings allowed)
31st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31st Mar	Royalty receivable A/c	Dr.	12500
	To Profit &Loss A/c			12500
	(Being royalty received transferred to the Profit &Loss A/c)
2nd Year
31st Mar	X Ltd’s A/c	Dr.	20000
	To Royalty receivable A/c			15000
	To Short-workings Allowable A/c			5000
	(Being royalty due from X Ltd. and short-workings allowed)
31st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31st Mar	Royalty receivable A/c	Dr.	15000
	To Profit &Loss A/c			15000
	(Being royalty received transferred to the Profit &Loss A/c)
3rd Year
31st Mar	X Ltd’s A/c	Dr.	22500
	To Royalty receivable A/c			22500
	(Being royalty due from X Ltd.)
31st Mar	Short-workings Allowable A/c	Dr.	2500
	To X Ltd.’s A/c			2500
	(Being amount of short-workings recouped)
31st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31st Mar	Royalty receivable A/c	Dr.	22500
	To Profit &Loss A/c			22500
	(Being royalty received transferred to the Profit &Loss A/c)
4th Year
31st Mar	X Ltd’s A/c	Dr.	25000
	To Royalty receivable A/c			25000
	(Being royalty due from X Ltd.)
31st Mar	Short-workings Allowable A/c	Dr.	5000
	To X Ltd.’s A/c			5000
	(Being amount of short-workings recouped)
31st Mar	Bank A/c	Dr.	20000
	To X Ltd.’s A/c			20000
	(Being money received from X Ltd.)
31st Mar	Royalty receivable A/c	Dr.	25000
	To Profit &Loss A/c			25000
	(Being royalty received transferred to the Profit &Loss A/c)
5th Year
31st Mar	X Ltd’s A/c	Dr.	30000
	To Royalty receivable A/c			30000
	(Being royalty due from X Ltd.)
31st Mar	Bank A/c	Dr.	30000
	To X Ltd.’s A/c			30000
	(Being money received from X Ltd.)
31st Mar	Royalty receivable A/c	Dr.	30000
	To Profit &Loss A/c			30000
	(Being royalty received transferred to the Profit &Loss A/c)
31st Mar	Short-workings Allowable A/c	Dr.	5000
	To Profit and Loss A/c			5000
	(Being the amount of short-workings lapsed)

X Ltd.’s A/c

Date	Particulars	Amount		Date	Particulars	Amount
1st Year				1st Year
31 Mar	To Royalty receivable A/c	12500		31 Mar	By Bank A/c	20000
31 Mar	To Short-workings Allowable A/c	7500
		20000				20000
2nd Year				2nd Year
31 Mar	To Royalty receivable A/c	15000		31 Mar	By Bank A/c	20000
31 Mar	To Short-workings Allowable A/c	5000
		20000				20000
3rd Year				3rd Year
31 Mar	To Royalty receivable A/c	22500		31 Mar	By Short-workings Allowable A/c	2500
				31 Mar	By Bank A/c	20000
		22500				22500
4th Year				4th Year
31 Mar	To Royalty receivable A/c	25000		31 Mar	By Short-workings Allowable A/c	5000
				31 Mar	By Bank A/c	20000
		25000				25000
5th Year				5th Year
31 Mar	To Royalty receivable A/c	30000		31 Mar	By Bank A/c	30000
		30000				30000

Working Notes:

Calculation of Royalty, Minimum Rent and Short-workings

Year	Books sold	Rate per book	Royalty	Minimum Rent	Short-workings
1	2500	5	12500	20000	7500
2	3000	5	15000	20000	5000
3	4500	5	22500	20000
4	5000	5	25000	20000
5	6000	5	30000	20000

Computation of Recoupment, Short-workings carried forward and transferred to profit and loss A/c

Year	Recoupment	Short-workings carried forward	Transferred to P&L A/c	Payment to Bharat
1		7500		20000
2		12500		20000
3	2500	10000		20000
4	5000	5000	5000	20000
5				30000