Royalty Advances
May 24, 2008
Publishers often pay authors in advance of publication. How should this be accounted for?
The appropriate procedure is to create a balance sheet asset account called Royalty Advances. This is an asset as it will technically be refunded to the publisher if the book does not earn back its royalty advance (PS: most publishers write-off any unearned advance and do not demand repayment). This amount will reduce the amount of future royalty payables.
When a royalty advance is paid credit (reduce) cash and debit (increase) Royalty Advance - the balance sheet account.
When the book is published you apply the royalty advance against the royalties earned/payable. This reduces the amount of money that you owe the author, but not the royalty expense (as you paid some of the royalty expense in advance of publication).
If the book is not published or royalties are not expected to cover the the royalty advance the publisher should write off the remaining balance of the book’s royalty advance. This will credit (reduce) royalty advances and a debit (increase) the expense account Royalty Advance Write-offs.
Tip: Review your royalty advance balances at least twice a year and write down any advances you do not expect royalties to cover.
Tax Note: In the United States royalty advances are taxable to the author when they are paid. All amounts $10 or more are reportable to the Internal Revenue Service on the author’s 1099 statement in Box 2 - Royalties. For foreign authors the amount is reported on form 1042.
Software Tip: Make sure that your royalty software and can print a schedule of royalty advances showing date paid, amount, title and expected or actual publication date.
