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(b) The lessee has the right to recoup the short workings within two years following
the payment of the respective short workings and not afterwards.

Accounting entries in the books of the lessor
The following accounts are to be maintained in the books of the lessor:
FOR ONLINE READING ONLY
Royalty Receivable account: This account is used to record the amount of royalties
earned in any period by the entity from lessee who uses lessor’s assets under royalty
agreements. This account is created by the owner of the asset.
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Lessee account: This account is used to record royalty receivable, amount received from
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lessee and short workings. It is an asset account.
Short workings allowable account: This account is used to record the excess amount
of minimum rent over the actual royalties allowable to lessee.

The following table provide relevant illustration regarding the accounting entries of
royalty transactions in the books of lessor:

SN Narrations Details
1. When production is made or Dr Lessee account xx
royalty is due Cr Royalty receivable account xx
With the actual royalties based on the number of units
produced
2. When there are short workings Dr Lessee account xx
(actual royalty is less than the Cr S/workings allowable account xx
agreed minimum rent) With the excess of minimum rent over actual royalty

3. When payment is received Dr Bank account xx
Cr Lessee account xx
With the amount received

4. When short working is recouped Dr Short workings allowable account xx
Cr Lessee account xx
With the amount recouped

5. When transferring royalty Dr Royalty receivable account xx
income to statement of profit or Cr statement of profit or loss xx
loss With the balance of the royalty receivable account

6. When transferring irrecoverable Dr S/working allowable account xx
amount of short working to Cr statement of profit or loss xx
statement of profit or loss With any outstanding short working whose recoupment
period is expired

Student’s Book Form Five
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