The term royalty is concerned with the assets of tangible or intangible in nature. The assets like land, building, mines, copyright, patent, trademark etc. are attracted with royalty. Royalty is a periodical payment to be paid by the user of the assets of the above nature. It is a sum payable for enjoying the benefits of certain rights vested with the other person. The person who makes payment and uses the assets is known as 'Lessee'. And the person who surrenders the right and receives the royalty is known as 'Lessor'.
The 'Lessor' is the owner of assets. Author of a book, holder of patent, land lord of mine etc. are the examples of Lessor. The lessee acquires the right to use the lessor's property. For it, the lessee pays a certain amount to the lessor, which is termed as royalty. Publisher, patent user, trade mark user, licencee etc are the examples of lessee.
Royalty payable is an ordinary business expenditure for the lessee and royalty receivable is an income for the lessor. It can be paid either on the basis of unit sold or on the basis of output. If it is paid on the basis of the unit sold, it is transferred to profit and loss account. Royalties paid on the basis if output is transferred to the production account. If nothing is specified, royalties paid is transferred to profit and loss account.
A royalty is generally, paid to the owner of the right under the following cases:
1. When the government or local authority allows some person to collect forest products like honey, herbs, clay etc. from the forest, the government or local authority is the owner or lessor and the person who collects is the lessee.
2. When the owner of mines like coal, copper, stone allows other party to extract materials from land.
3. When the right of owner like copyright, patent right, trade mark, exclusive right of design are licenses to some other party.
