If yours is a small business, such as an art gallery, make sure your accounting software and bookkeeping system include a section for royalties. It can be hard to find software that includes this option, so shop carefully. For example, Easy Royalties and Metacomet solutions can be some of the most affordable options, depending on your business model. [4] X Research source If yours is a mid-sized business, hire a royalty accountant. Some accountants specialize in royalties, so they will be able to input a royalty-accounting system into your bookkeeping to ensure that all royalty payments are made on time. If you are in charge of a large business, set up a royalty department. This department may include accountants, information technology (IT) professionals, and lawyers. If you are constantly acquiring new products that involve royalty payments, or you are in a large-scale software, music, art or renewable-resource business, then this is the recommended path. You may also consider hiring an accounting firm as an outside royalty department.
For example, a $10,000 advance payment would be recorded as a $10,000 debit to prepaid royalties and a $10,000 credit to the cash account.
For example, imagine that the licensee who distributed the $10,000 advance payment in the example above owes the licensor 7 percent of net income, which totaled $100,000 for the current period. The total royalty payment, 7 percent of $100,000 or $7,000, would be debited to the royalty expense account and credited to the prepaid royalties account. Assuming net income remained the same for the next period, a different set of entries would be made. First, the royalty expense account would be debited for the full royalty amount, $7,000. The prepaid royalty account now only totals $3,000 ($10,000 original minus $7,000 from last period). So, this $3,000 would be credited to prepaid royalties and that account would be closed. Now, the remaining $4,000 would be credited to the cash account. [8] X Research source
For example, an author might receive $1 per book for the first 10,000 sold, then $1. 50 per book for any sales after that. If 20,000 books are sold within this period, then the author would receive a total of $25,000 in royalty payments (10,000 x $1 + 10,000 x $1. 50). This would be recorded as a $25,000 debit to royalty expenses and a $25,000 credit to accrued royalties. Any accrued liability is reduced at the end of the period the royalties are paid out.
For example, some a licensee may forget to incorporate consideration of their business model (payment timing, tax structure, etc. ) in the contract. This may result in unintentionally low or late payments to the licensor. In this case, the licensee would likely lose a court case over the royalties owed and be liable for more costs.
