Accounting Treatment of Royalty & Shortworkings

1. The 9-Column Analytical Table (Royalty Table)

Before writing journal entries or opening ledger accounts, every student must prepare the Analytical Table of Royalties. If this table is calculated accurately, the journal entries and ledger accounts become a simple, mechanical copy-paste!

Standard 9-Column Format:

How Columns are Computed:

• Col 3 (Actual Royalty): Output (Col 2) × Rate per unit.
• Col 4 (Minimum Rent): Fixed guaranteed amount agreed in the contract.
• Col 5 (Shortworkings Created): If Col 4 > Col 3, then (Col 4 - Col 3). Otherwise Nil.
• Col 6 (Shortworkings Recouped): When Col 3 > Col 4 (Surplus), recover past unexpired shortworkings up to the surplus available.
• Col 7 (Shortworkings Lapsed / Transferred to P&L): Unrecouped shortworkings whose legal recovery deadline has expired.
• Col 8 (Payment to Landlord): Actual Royalty + Shortworkings Created - Shortworkings Recouped (i.e., Minimum Rent or Actual Royalty minus Recoupment).
• Col 9 (Closing Balance of Shortworkings): Running balance carried forward as an asset to the Balance Sheet.

2. Journal Entries in the Books of Lessee (Tenant / Mining Co.)

The Lessee passes three sets of entries every year:

Case 1: When Actual Royalty is LESS THAN Minimum Rent (Shortworkings Arise)

1. For Royalty and Shortworkings due to Landlord:

   Royalty A/c ..................................... Dr.   [Actual Royalty]
   Shortworkings A/c ............................... Dr.   [Shortworkings]
       To Landlord A/c ...................................   [Minimum Rent]
   (Being royalty and shortworkings due to landlord)

2. For Payment made to Landlord:

   Landlord A/c .................................... Dr.   [Minimum Rent]
       To Bank / Cash A/c ................................   [Minimum Rent]
   (Being payment made to landlord)

3. For Transferring Royalty to Manufacturing / Profit & Loss Account:

   Manufacturing A/c (or P&L A/c) ................... Dr.   [Actual Royalty]
       To Royalty A/c ....................................   [Actual Royalty]
   (Being royalty transferred to production/P&L account)

Case 2: When Actual Royalty EXCEEDS Minimum Rent (Surplus Used for Recoupment)

1. For Royalty Due and Shortworkings Recouped:

   Royalty A/c ..................................... Dr.   [Actual Royalty]
       To Landlord A/c ...................................   [Actual Royalty - Recoupment]
       To Shortworkings A/c ..............................   [Amount Recouped]
   (Being royalty due and past shortworkings recouped)

2. For Payment to Landlord:

   Landlord A/c .................................... Dr.   [Net Amount]
       To Bank A/c .......................................   [Net Amount]
   (Being payment made to landlord)

3. For Unrecouped Shortworkings Lapsed (if time limit expired):

   Profit & Loss A/c ............................... Dr.   [Lapsed Amount]
       To Shortworkings A/c ..............................   [Lapsed Amount]
   (Being unrecoverable shortworkings written off to P&L)

4. For Transferring Royalty to P&L:

   Manufacturing / P&L A/c .......................... Dr.   [Actual Royalty]
       To Royalty A/c ....................................   [Actual Royalty]
   (Being royalty transferred to P&L)

3. Comprehensive Solved Practical Numerical Problem

Problem: Coal Mines Ltd. leased a coal mine from Shri Verma on 1st January 2023 on a royalty of ₹5 per ton of coal raised. The minimum rent was fixed at ₹40,000 per annum with the right to recoup shortworkings during the first 3 years of the lease (Fixed Period).

The annual coal output was:

• 2023: 5,000 tons
• 2024: 7,000 tons
• 2025: 10,000 tons
• 2026: 12,000 tons

Prepare the Analytical Table, and write the Royalty A/c, Shortworkings A/c, and Shri Verma’s (Landlord) A/c in the books of Coal Mines Ltd.

Step 1: Prepare the Analytical Table

• Royalty Rate = ₹5 per ton; Minimum Rent = ₹40,000 per year.
• Recoupment period: First 3 years only (2023, 2024, 2025). Any unrecovered balance after 2025 lapses to P&L!

Explanation of Calculations:

• 2023: Actual ₹25k < Min Rent ₹40k → Shortworkings created = ₹15,000. Paid ₹40,000.
• 2024: Actual ₹35k < Min Rent ₹40k → Shortworkings created = ₹5,000. Cumulative deficit = ₹20,000. Paid ₹40,000.
• 2025: Actual ₹50k > Min Rent ₹40k → Available surplus = ₹10,000.
  • Recouped ₹10,000 out of cumulative ₹20,000 deficit.
  • Remaining unrecouped balance = ₹10,000.
  • Because 2025 is the 3rd and final year of the recoupment period, this remaining ₹10,000 permanently lapses and is transferred to Profit & Loss Account!
  • Payment to Landlord = Actual Royalty ₹50,000 - Recouped ₹10,000 = ₹40,000.
• 2026: Actual ₹60,000 > Min Rent ₹40,000. No shortworkings pending. Paid full ₹60,000.

Step 2: Ledger Accounts in the Books of Coal Mines Ltd.

1. Royalty Account

Dr.                                    Royalty Account                                   Cr.
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| Date   | Particulars   | J.F | Amount (₹) | Date   | Particulars       | J.F | Amount (₹) |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2023   | To Shri Verma |     |     25,000 | 2023   | By Production A/c |     |     25,000 |
| 2024   | To Shri Verma |     |     35,000 | 2024   | By Production A/c |     |     35,000 |
| 2025   | To Shri Verma |     |     50,000 | 2025   | By Production A/c |     |     50,000 |
| 2026   | To Shri Verma |     |     60,000 | 2026   | By Production A/c |     |     60,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+

2. Shortworkings Account

Dr.                                 Shortworkings Account                                Cr.
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| Date   | Particulars   | J.F | Amount (₹) | Date   | Particulars       | J.F | Amount (₹) |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2023   | To Shri Verma |     |     15,000 | 2023   | By Balance c/d    |     |     15,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2024   | To Balance b/d|     |     15,000 |        |                   |     |            |
|        | To Shri Verma |     |      5,000 | 2024   | By Balance c/d    |     |     20,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
|        | TOTAL         |     |    ₹20,000 |        | TOTAL             |     |    ₹20,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2025   | To Balance b/d|     |     20,000 | 2025   | By Shri Verma     |     |     10,000 |
|        |               |     |            |        |  (Recouped)       |     |            |
|        |               |     |            | 2025   | By Profit & Loss  |     |     10,000 |
|        |               |     |            |        |  (Lapsed)         |     |            |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
|        | TOTAL         |     |    ₹20,000 |        | TOTAL             |     |    ₹20,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+

3. Shri Verma (Landlord) Account

Dr.                                  Shri Verma Account                                  Cr.
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| Date   | Particulars   | J.F | Amount (₹) | Date   | Particulars       | J.F | Amount (₹) |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2023   | To Bank A/c   |     |     40,000 | 2023   | By Royalty A/c    |     |     25,000 |
|        |               |     |            |        | By Shortworkings  |     |     15,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2024   | To Bank A/c   |     |     40,000 | 2024   | By Royalty A/c    |     |     35,000 |
|        |               |     |            |        | By Shortworkings  |     |      5,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2025   | To Shortwork. |     |     10,000 | 2025   | By Royalty A/c    |     |     50,000 |
|        | To Bank A/c   |     |     40,000 |        |                   |     |            |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+
| 2026   | To Bank A/c   |     |     60,000 | 2026   | By Royalty A/c    |     |     60,000 |
+--------+---------------+-----+------------+--------+-------------------+-----+------------+

4. Journal Entries in the Books of Lessor (Landlord)

In the books of the Lessor (the receiver of money):

• Royalty is an Income (credited).
• Shortworkings is called Royalty Reserve or Shortworkings Allowable (credited when created as a liability to allow future adjustment).

1. When Royalty is Due (with Shortworkings):

   Lessee A/c ..................................... Dr.   [Minimum Rent]
       To Royalty Receivable A/c .........................   [Actual Royalty]
       To Royalty Reserve A/c ............................   [Shortworkings]

2. When Payment Received from Lessee:

   Bank A/c ........................................ Dr.   [Amount Received]
       To Lessee A/c .....................................   [Amount Received]

3. When Past Shortworkings Recouped by Lessee:

   Royalty Reserve A/c ............................. Dr.   [Recouped]
       To Lessee A/c .....................................   [Recouped]

4. When Unrecouped Shortworkings Lapse (Profit to Landlord):

   Royalty Reserve A/c ............................. Dr.   [Lapsed Amount]
       To Profit & Loss A/c ..............................   [Lapsed Amount]

5. Summary & Quick Revision Checklist

• Master the 9-Column Analytical Table first: Output → Actual Royalty → Minimum Rent → Shortworkings Created/Recouped/Lapsed → Payment to Landlord → Balance.
• In Lessee books, Royalty A/c is an expense (debited); Landlord A/c is credited; Shortworkings A/c is an asset until recouped or written off.
• When shortworkings time limit expires, transfer balance to Profit & Loss Account.
• In Lessor books, Royalty Receivable is an income (credited); shortworkings is credited as Royalty Reserve.