Page 176 - Accountancy_F5

The concept of short workings
Short working is that amount by which the minimum rent exceeds actual royalty. In
some periods, the actual royalty may be higher or lower than the minimum rent. Short
working occurs when the lessee is required to pay more (minimum rent) for the royalty

than what is actually earned. For example, an author of a book enters into a contract
FOR ONLINE READING ONLY
with the publisher to sell his books on copyrights agreement. The contract binds the
publisher to pay a royalty fee of TZS 8,000 per book sold or TZS 6,000,000 as minimum
rent. During the year 2024, the publisher sold 680 copies of books at TZS 10,000 each,
LANGUAGE EDITING
making the total revenue of TZS 6,800,000. In this case actual royalty is TZS 5,440,000
being (680x8000), while minimum rent is TZS 6,000,000. Therefore, the lessee will
LANGUAGE EDITING
pay the minimum rent, short workings being equal to TZS 560,000 (TZS (6,000,000 –

5,440,000)). However, certain contracts do not provide for minimum rent. In this case,
actual royalties are paid and therefore the issue of short working does not arise.

Surplus
When the actual rent is higher than the minimum rent, the difference is called surplus.
Consider the previous example under short workings, and assume that the lessee managed

to sell 1,000 copies of the book. In this case, the total revenue is TZS 10,000,000, paying
TZS 8,000,000 as royalty. The surplus payment over minimum rent is therefore TZS
2,000,000. In example 6.1, short workings would appear in the second year, and this
would be TZS 4,000,000, while in year 1 there was a surplus of TZS 12,000,000. See
the table below:
Analysis table

Quantity in TZS Actual Minimum Royalty Short
Year royalty rent paid workings
litre per litre TZS TZS TZS TZS

1 48,000 1,000 48,000,000 36,000,000 48,000,000 -

2 32,000 1,000 32,000,000 36,000,000 36,000,000 4,000,000

Recoupment of short workings
Usually, a royalty agreement provides a provision for carrying forward the short workings
with a view to make adjustments in future surplus. If the lessee has paid for short
workings during the previous period, the royalty agreement may give the lessee the
right to recover such short workings in the subsequent favourable years. This process is
known as recoupment and that right is called right to recoupment. Usually in a contract
where there is provision of minimum rent, there is also a provision of recoupment of
short workings. The lessee can accumulate the short workings for a period of time until

Student’s Book Form Five
163

23/06/2024 17:35
ACCOUNTANCY_DUMMY_23 JUNE.indd 163
ACCOUNTANCY_DUMMY_23 JUNE.indd 163 23/06/2024 17:35