Accounting Treatment in the Books of Lessee

Royalty means a periodic payment made by one person to another person for using the right to resources. The person who gives the right to use resource is lessor and the person who uses it is the lessee. Here we are going to discuss accounting treatment in the books of the lessee. Let’s get started.

Accounting Treatment in the Books of Lessee

Date	Particular		Amount	Amount
1.When Royalty is Payable	Royalty A/c (Actual Royalty)	Dr.	xx
	Short-workings A/c	Dr.	xx
	To Lessor A/c (Minimum Rent)			xx
	(Being payment due)
2.For Payment to Lessor	Lessor A/c	Dr.	xx
	To Bank A/c			xx
	(Being amount paid)
3. For Transferring Royalty	Trading/Profit and Loss/Manufacturing/Production A/c	Dr.	xx
	To Royalty A/c			xx
	(Being amount transferred to relevant account)
4. When Short-workings is recouped	Royalty A/c	Dr.	xx
	To Short-workings A/c (Recoupment)			xx
	To Lessor A/c – actual payment			xx
	(Being recoupment done)
5. For irrecoverable short-working	Trading/Profit and Loss/Manufacturing/Production A/c	Dr.	xx
	To short-working A/c (amt. lapsed)			xx
	(Being amount charged to relevant account)

Note: (Only for entry 4&5)

• The Journal Entries given above assume that there is a clause on Minimum Rent and Recoupment of Short- working subsequently written to the lessee.
• Royalties based on output should be debited to Manufacturing or Production Account whereas royalty based on sales be treated as selling expenses should be debited to Trading Account or Profit and Loss Account.

Source: depositphotos

Solved Example for You

Q: AB Ltd. got the lease of a colliery on the basis of Rs.5 per tonne of coal raised subject to a Minimum Rent of Rs.1,00,000 p.a. The tenant has the right to recoup short-workings during first four years of the lease and not afterward. Assume that the year ends on 31 December every year.

The output in four years was 9000, 13000, 25000, 27000 and 50000 respectively. Give the Journal entries and ledger accounts in the books of AB Ltd.

Ans: Computation of Royalty, Minimum Rent and Short-workings

Year	Quantity in tonnes	Rate per tonne	Royalty	Minimum Rent	Short-workings
1	9000	5	45000	100000	65000
2	13000	5	65000	100000	45000
3	25000	5	125000	100000
4	27000	5	135000	100000
5	50000	5	250000	100000

Computation of Recoupment, Short-workings carried forward, Transferred to P&L Account

Year	Recoupment	Short-working carried forward	Transferred to P&L Account	Payment to Lessor
1		65000		100000
2		100000		100000
3	25000	75000		100000
4	35000		40000	100000
5				250000

Journal Entries Year: 1

Date	Particular		Amount (Dr.)	Amount (Cr.)
31 Dec	Royalty A/c	Dr.	45000
	Short-workings A/c	Dr.	65000
	To Lessor A/c			100000
	(Being payment due)
31 Dec	Lessor A/c	Dr.	100000
	To Bank A/c			100000
	(Being amount paid)
31 Dec	Profit and Loss A/c	Dr.	45000
	To Royalty A/c			45000
	(Being amount charged to relevant a/c)

Journal Entries Year 2

Date	Particular		Amount (Dr.)	Amount (Cr.)
31 Dec	Royalty A/c	Dr.	65000
	Short-workings A/c	Dr.	45000
	To Lessor A/c			100000
	(Being payment due)
31 Dec	Lessor A/c	Dr.	100000
	To Bank A/c			100000
	(Being amount paid)
31 Dec	Profit and Loss A/c	Dr.	65000
	To Royalty A/c			65000
	(Being amount charged to relevant a/c)

Journal Entries Year 3

Date	Particular		Amount (Dr.)	Amount (Cr.)
31 Dec	Royalty A/c	Dr.	125000
	To Short-workings A/c			25000
	To Lessor A/c			100000
	(Being payment due)
31 Dec	Lessor A/c	Dr.	100000
	To Bank A/c			100000
	(Being amount paid)
31 Dec	Profit and Loss A/c	Dr.	125000
	To Royalty A/c			125000
	(Being amount charged to relevant a/c)

Journal Entries Year 4

Date	Particular		Amount (Dr.)	Amount (Cr.)
31 Dec	Royalty A/c	Dr.	135000
	To Short-workings A/c			35000
	To Lessor A/c			100000
	(Being payment due)
31 Dec	Lessor A/c	Dr.	100000
	To Bank A/c			100000
	(Being amount paid)
31 Dec	Profit and Loss A/c	Dr.	135000
	To Royalty A/c			135000
	(Being amount charged to relevant a/c)
31 Dec	Profit and Loss A/c	Dr.	40000
	To short-working A/c			40000
	(Being amount charged to relevant a/c)

Journal Entries Year 5

Date	Particular		Amount (Dr.)	Amount (Cr.)
31 Dec	Royalty A/c	Dr.	250000
	To Lessor A/c			250000
	(Being payment due)
31 Dec	Lessor A/c	Dr.	250000
	To Bank A/c			250000
	(Being amount paid)
31 Dec	Profit and Loss A/c	Dr.	250000
	To Royalty A/c			250000
	(Being amount charged to relevant a/c)

Ledgers account in Lessee Books

Lessor A/c

Date	Particulars	Amount		Date	Particulars	Amount
Year1	To Bank a/c	100000		Year1	By Royalty a/c	45000
					By Short-workings	65000
		100000				100000
Year2	To Bank a/c	100000		Year2	By Royalty a/c	65000
					By Short-workings	45000
		100000				100000
Year3	To Bank a/c	100000		Year3	By Royalty a/c	100000
		100000				100000
Year4	To Bank a/c	100000		Year4	By Royalty a/c	100000
		100000				100000
Year5	To Bank a/c	250000		Year5	By Royalty a/c	250000
		250000				250000

Short-workings A/c

Date	Particulars	Amount		Date	Particulars	Amount
Year1	To Lessor a/c	65000		Year1	By balance c/d	65000
		65000				65000
Year2	To balance b/d	65000		Year2
	To Lessor a/c	45000			By balance c/d	100000
		100000				100000
Year3	To balance b/d	100000		Year3	By Royalty a/c	25000
					By balance c/d	75000
		100000				100000
Year4	To balance b/d	75000		Year4	By Royalty a/c	35000
					By P&L a/c	40000
		75000				75000

Royalty A/c

Date	Particulars	Amount		Date	Particulars	Amount
Year1	To Lessor	45000		Year1	By P&L	45000
		45000				45000
Year2	To Lessor	65000		Year2	By P&L	65000
		65000				65000
Year3	To Lessor	100000		Year3	By P&L	125000
	To Short-workings	25000
		125000				125000
Year4	To Lessor	100000		Year4	By P&L	135000
	To Short-workings	35000
		135000				135000
Year5	To Lessor	250000		Year5	By P&L	250000