Do you lump unearned royalties in with your royalties payable? If so, you are not following generally accepted accounting principles (GAAP).
According to GAAP unearned royalties (an asset) should not be combined with royalties payable (a liability) on the balance sheet.
Unearned royalties are an asset. They occur when you have overpaid royalties when returns for a period exceeds the periods sales – thus creating a negative royalty expense.
Royalties payable are a liability that you need to payout in a defined period of time. If you lump them together you understate your payables and give management a false impression as to what the true liability.
Example – the correct method
1. Asset: Unearned Royalties $500, Liabilities: Royalties Payables $1,500
Example – the incorrect method
2. Liabilities: Royalties Payable $1,000 ($1,500 credit plus $500 asset)
When evaluating royalty software ask if the software seperates unearned royalties from royalties payable. So do and some don’t. If they don’t ask the vendor how to obtain the balances for each account. Your accounting staff will need to know this if they want to pass an audit without an adjusting entry from the auditor.