How to Recognize Royalties in Accounting

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Almost all accounting is done on either a cash or an accrual basis, though the latter is quite a bit more popular than the former. Cash basis accounting chooses to record revenues when the cash is received for them whereas accrual basis accounting chooses to record revenues when the transactions occur. Criteria for recognition of revenues under accrual basis accounting are that it must be earned and realizable. Royalties are accounted for in the same manner as other revenues in accounting

Instructions

1
Determine if the royalties have been earned. Earned means that the transactions that produce the revenues have been completed and that each side has fulfilled their duties in accordance with their contract. In this case, royalties are earned constantly from intellectual properties licensed for others' usage and are accounted for at the end of each accounting time period.

2
Determine if the royalties are realizable. Certain revenues are paid in cash, meaning that they are counted as realized. Realizable means that revenues born of transactions made on credit are expected to be collected in full and on time. Uncertain sums of revenue are usually estimated based on past incidences, but extreme uncertainty in the amount means that the recording of the transaction should wait until an invoice is received.

3
Record royalties as a debit to cash or receivables or some other asset, depending on the licensee's payment method and a credit to royalties revenue. This signifies that the holder of the intellectual properties has produced revenues through licensing out those same properties