- 20120 Royalties Payable (or Accounts Payable)
- 20140 Accrued Royalties Payable
- 20160 Royalty Reserves Payable
- 20180 Royalty Withholdings Payable
Royalties payable are the actual royalties that the company is obligated to pay out. It excludes statements with a negative balance (i.e. unearned royalties).
Accrued royalties payable reflect the estimated royalty liability on sales where royalties are not due for payment and for which statements have not been generated.
Royalty reserves payable reflects the liability to pay the amounts withheld in the future. Many royalty agreements allow the licensee to delay paying; usually for one royalty period, a percentage of the royalty earnings to cover returns that are expected to be received during the following period. This account shows the liability that the company has for this withholdings.
Royalty withholdings payable reflects deferred royalty payments. This typically arises when a royalty statement’s payable balance is below the contractual minimum payment amount. In this case, the payable balance is deferred to the next royalty statement. This deferral is a liability.
Companies with large royalty expenses; such as book, film and music publishers, often use a dedicated general ledger account for royalties payable. This facilitates the creation of separate accounts payable aging report for trade payables and royalties. Trade payables (for rent and operating expenses) are usually paid within 60 days. Royalties payable are usually paid quarterly, semi-annually or annually.
A dedicated royalties payable account also allows financial statements to present the balance of each account to management.
Example 1: One general ledger account for all payables
•20000 – Accounts Payable $300,000
Example 2: Separate account for Royalties Payable
•20000 – Accounts Payable $100,000
•20100 – Royalties Payable $200,000