Companies that handle royalties find that their chart of accounts typically have four royalty related expense accounts; one roll-up account and three sub accounts.
- Royalty Expenses (roll-up account)……$10,000
- Royalty Expenses……………………..$8,500
- Advance Write-off…………………….$1,000
- Unearned Royalties Write-off………..$500
Royalty Expenses roll-up account shows your total net royalty expense, including the balances from each sub-account.
Royalty expenses sub-account shows the royalty expense incurred on sales.
Advance write-offs tracks the value of advance payments were written-off because royalties from sales are not expected to cover the advance. The advance may also be written off if the product is canceled and the advance cannot be recoved.
Unearned royalty write-offs occur when royalties from future sales are not expected to cover the balance in unearned royalties.
Separating royalty expenses in this manner faciliates the management of royalty expenses. A high advance write-offs expense may indicate that your advances against future royalties are too large. A large unearned royalties write-off may suggest that your reserve for returns should be larger.