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the legal stand of the lessor to the sub-lessee. The lessee is paid based on the output
produced by the sub-lessee. In the most cases, the lessee charges a higher price to the
sub-lessee than that charged by the original lessor. Profit on such price is transferred to
the income statement.

Accounting entries in the books of Lessee with a sub-lease
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In addition to the fact that the lessee has to record transactions related to himself and his
lessor; the lessee also has to make records for transactions occurring between himself
and the sub lessee. Additional accounts are as follows:
Royalty receivable account: This account records periodical payments made by the
user of asset (sub lessee) to the lessee on the basis of actual output made by sub-lessee.
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Royalty receivable account: This account records the obligation to pay royalties based
on accrual output made by Lessee and sub lessee
Short workings allowable account: This account is used to record the excess amount of
minimum rent over the actual royalties allowable to sub-lessee. It is a liability account.
Sub-lessee account: This account is used to record royalty receivable, amount received
from sub-lessee and short workings allowable to the lessee, if any. It is an asset account.

The accounting entries:
The following are the accounting entries of royalty transactions in the books of lessee:
SN Narrations Details

1 When production is Dr Royalty payable account xx
done by both the lessee Cr Lessor account xx
and sub-lessee With the total production of lessee and sub-lessee

2 For production made by Dr Sub-lessee account xx
sub-lessee alone Cr Royalty receivable account xx
With the value of sub lessee’s production

3 To record payments Dr Bank account xx
from the sub-lessee Cr Sub-lessee account xx
With the amount received

4 When there is a short Dr Sub- lessee account xx
working and is re- Cr Short workings allowable account xx
couped in future by With the amount of the excess of minimum rent set for the
sub-lessee: sub-lessee over his actual royalty

Student’s Book Form Five
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