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How to Recognize Royalties in Accounting

Source from: http://www.ehow.com/how_8605460_recognize-royalties-accounting.html#ixzz25o4DJL8g

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

Difference between financial capital and physical capital

From
http://www.ehow.com/info_12061195_differences-between-physical-financial-capital.html

At its core, a business can be defined by assets. One way to describe assets is to break them down into categories. Though a hundred economists might categorize assets slightly differently when it comes to minutia and detail, two broad breakdowns agreed on by most people would be physical and financial capital. One way to think about it that physical capital is a tangible asset that can be touched in a real sense, while financial capital refers to the legal ownership of assets such as physical capital.

Physical Capital
A vision of factories and equipment often comes to mind when the term "physical capital" is invoked, and that is not inaccurate, but gaining a complete understanding of the idea requires a bit more detail. That description would also include the inventory sitting in stockrooms or warehouses, equipment from the tiniest screwdriver to the fleet of 18-wheel trucks, and fixed structures like office buildings, shopping malls, or factories. Physical capital is the tangible items used for actual production of the good or service provided by a company.

Financial Capital
Financial capital, on the other hand, is the legal ownership of all physical capital, as well as the monetary value of any asset that could be liquidated for cash. In fact, cash on hand is a form of financial capital, but so is stock shares, land titles, and other forms of property ownership. Financial capital might exist in large part as electronic entries in a computer database somewhere that denote how much money exists in a company's checking or savings accounts.