Small Press Royalty Software
September 30, 2008
JDC Software has just released Easy Royalties. Easy Royalties is an affordable and easy to use royalty software solution. Prices start range from $500 for 500 titles to $10,000 for an unlimited number of titles. Read more
That’s Rights Royalty Software
September 6, 2008
That’s Rights by JDC Software offers publishers an affordable royalty software alternative to more expensive publisher specific royalty management solutions. Read more
Auditors for New York Book Publishers
August 1, 2008
When book publishers in New York ask us to recommend CPA firms that know book publishing we usually recommend;
1. Eisner LLP based in New York with offices in New Jersey and Long Island.
2. Marks Paneth & Shron LLP, also based in New York.
3. Ernst & Young LLP, one of the big four accounting firms.
Auditing Book Publishers
July 16, 2008
If you are a book publisher with sales of $5M or more, or a small publisher owned by a larger company its likely that your books are audited by an outside certified public accounting firm.
To minimize this expense you need to know what they will be looking for and be prepared to answer their questions. Here are the six areas that we see auditors of book publishers focusing on; Read more
Audit 101 Accounts Receivable
June 1, 2008
This post is the first of a series on how to pass an audit of your book publishing firm with flying colors.
1. Accounts Receivable
When an outside auditor looks at your book publihsing trade A/R (accounts due from customers) they are likely looking for several things;
a. Are your A/R properly classified. Accounts with a credit balance (i.e. they have a credit balance, most likely for returned books) should be classified as a liability not an asset.
b. Do you resonably expect to collect on the amounts listed within one year?
c. Is your allowance for doubtful accounts a realisitc and supportable number?
d. Is your allowance for future returns a realistic and supportable number?
e. Have you reconciled the A/R balances of your major accounts?
Prepress Expenses & Inventory
May 26, 2008
Publishers frequently ask how should prepress expenses be handled?
Prepress expenses are the prepartory work that goes into preparing a manuscript for the printer. Typesetting, design, proofreading, editing and art work are examples of prepress expenses.
Publishers of medical books, educational texts and large reference works usually capitalize prepress expenses and amortize the expense over the expected life of the title - usually two to three years.
Publishers of trade books usually include prepress expenses as part of the inventoriable cost (printing, paper and binding). This expenses all of the prepress expenses over the sales of the first printing.
From the perspective of GAAP (Generally Accepted Accounting Principlies) both methods are correct.
The educational textbook publisher expects his books to have a life of three years and go through several printings. By amortizing prepress expenses over time these expenses are allocated accross all printings.
The trade book publisher expects that his books will “most likely” have a life of one year and thus including the cost of prepress expenses in his inventoriable cost is proper.
Intercompany Sales
May 24, 2008
Occassionaly we come accross book publishers that operate several companies and transfer books among these related companies for resale. The question arises as to what is the proper way to account for sales.
Some publishers account for them as normal sales. This recognizes income at the time of the stock transfer, even though the inventory has not been resold to the final consumer.
Others transfer the stock on a consignment basis. With this method the original publisher retains title until the stock is sold. This delays revenue recognition until the books are sold to the final consumer.
The proper way to account for these transfers is to treat them as consignment sales.
Why?
- You do not recognize income until the stock is actually sold to the end user (ie retailer, wholesaler).
- You minizime your taxable income.
Reserve for Returns
May 24, 2008
Book publishers sell books to stores and they return unsold texts for full credit. The rate of returns can exceed 30% of sales. Thus a sale is not really a sale.
Accounting standards (SFAS 48 and SFAS 5) state that estimated losses from contingencies (returns) shall be accrued against income, thus reducing income and accounts receivable.
All major publishers maintain a reserve for returns. For example:
John Wiley’s 1999 Annual Report:
Sales Returns and Doubtful Accounts: The Company provides an estimated allowance for doubtful accounts and for future returns on sales made during the year. The allowance for doubtful accounts and returns (estimated returns net of inventory and royalty costs) is shown as a reduction of receivables in the accompanying consolidated balance sheets and amounted to $41.8 and $41.6 million at April 30, 1999 and 1998, respectively.
How do you calculate the reserve?
Look at the rate of return on similar sales that you incurred in the past. Similar sales? For most book publishers this means calculating returns on sales to resellers and consumers separately. You make this two part calculation because resellers return more than consumers (15% to 40% vs. <1%).
Tax Implications & Software Tip
The IRS Code normally does not allow you to claim a deduction for expected future returns. Thus you pay taxes on income you may not receive.
There is one exception to this rule. Under Section 458 of the IRS code you can claim a deduction for paperback returns received in the first 4 1/2 months of the following year. Publishers intent on minimizing their tax liability should be careful to track sales & returns by binding: hardcover and paperback.
This provision is elective and “the election is made by filing a statement with the income tax return for the first taxable year for which the election is to apply.” - Accounting and Finance for Magazine (& Book) Publishers by Peter M. Craig
Software Tip: To take advantage of this deduction you should make sure that your software can track sales by binding - ie paperback.
Royalty Reporting for US Publishers
May 24, 2008
The Internal Revenue Service requires that companies report royalties paid to US Authors via form 1099MISC. Royalty payments of $10 or more must be reported to the IRS.
Royalties Paid to Foreign Authors
Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of royalty income. This tax is imposed on the gross amount paid and is generally collected by withholding on that amount. The publisher must report this withholding to the IRS on form 1042S.
Foreign authors can file form W-8BEN to claim a reduced rate of, or exemption form withholding, as a resident of a foreign country with which the US has a tax treaty.
For example the withholding rate for a UK citizien is 0% and an Italian citizen 5%, if they file a W-8BEN form. The W-8BEN form submission is good for a period of 3 years if filed without a US taxpayer ID number.
Tax Forms
Copies of all forms and publications referred to on this page can be obtained at www.irs.gov.
Software Tip: If you are a US company and deal with a substantial number of foreign authors you should ask if the vendor’s accounting module can print the 1042S forms, in addition to the 1099 forms.
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.
