Royalty Accounting & Systems
EILEEN MARKS, HARVARD BUSINESS SCHOOL
Publishers often consider royalties to be part of the back office operations, when in reality they are generally one of the few points of contact a publisher has with an author after his or her book is published. Authors, on the other hand, pay a lot of attention to royalty payments (although how closely they read their statements is a matter for debate!). Royalties should therefore be considered an important part of the author-publisher relationship, and clear communication and timely payment of royalties should be a matter of concern at the highest levels of the organization. The Authors Guild and the Book Industry Systems Advisory Committee (BISAC) both publish suggested royalty statement formats, which publishers may find useful when designing their own statements. These formats may be obtained from the Authors Guild at (212) 563-5904.
Royalty Advances. Unearned advances should remain on the asset side of the balance sheet until they are earned out, at which point the book is transferred to the liability side. If returns cause the balance to become negative later, the title is not transferred back to the asset side; however, the figure that is carried on the balance sheet should be the sum of the positive amounts payable, since that is the real amount of the publisher's royalty liability. Advances that have not earned out should be written off after it reasonably appears that they are not ever going to earn out. The write-off, of course, should not be applied to the author's account in the royalty system (or on the author's statement!); if it were applied there, any sales that did trickle in would generate a royalty payment. For this reason write-offs should be tracked in a subsidiary ledger and maintained as a contra-account against advances on the asset side of the balance sheet, rather than being removed from the balance sheet altogether, in order for the royalty system to balance with the financial statements.
Monthly Royalty Expense. The monthly entry consists of a debit to royalty expense, which is part of the cost of goods sold, and a credit to the royalties payable liability. This entry can be either an estimate calculated as a percentage of sales based on historical data or an actual figure provided by the publisher's automated royalty system.
Subsidiary Rights Income. As income is received, the share belonging to the publisher is credited to the income account "Other Publishing Income," and the share belonging to the author is credited to the liability account "Royalties Payable." If your author contract calls for subrights income to "flow through," or be paid upon receipt to the author after the advance is earned out, then Cash should be credited rather than Royalties Payable.
Author's Charges. Expenses that will be charged against an author's royalties should be credited as they occur to Cash (or Sales, in the case of book purchases) and debited to either Author Accounts Receivable or Advances. Examples of author's charges include costs of proofreading, indexing, and author's alterations.
Reserves. The author contract may permit part of the earnings payable to the author on a new book to be withheld for several royalty periods as a reserve against future returns, to ensure that the author is not paid for books that do not actually sell through. If such an overpayment were to occur, it would be highly unlikely that the author would reimburse the publisher. Although each contract is different, a 20%-30% reserve held for three to four periods is not uncommon. Some publishers automatically withhold a reserve on every new book, while others make a title-by-title decision based on the type of book (a trade book being more likely to suffer high returns than a scholarly title). Since the reserve is still a liability, albeit a deferred one, it should not be netted from the total Royalties Payable liability account.
Joint Accounting. Joint accounting gives the publisher the right to offset an author's earnings on one title against unearned advances or losses on another. This almost always occurs with hardcover and paperback editions of the same book, but contracts sometimes permit this practice with different titles as well.
Royalty Statements. Although many large publishers have a fully automated process, this section assumes otherwise. The following example illustrates the process the publisher goes through semiannually, or however frequently royalties are calculated and paid to authors.
The variance between the total of the monthly accrual and the actual Earnings from Book Sales calculated for the period should be reconciled against Royalty Expense and Royalties Payable. For example, assume that you accrued a monthly royalty expense of 10% of sales that totaled $150,000 at the end of the royalty period. Later you calculated actual royalties to be $135,000. The reconciling entry would be:
The next step is to record the actual royalty payment. Let's assume that the royalty system calculated $135,000 in Earnings from Book Sales plus $50,000 from subrights income due to authors. The total actually paid out to authors would be less than $185,000 because of offsetting entries. The actual payment might be posted as follows:
|Royalties Payable||$135,000||Earnings from book sales|
|Royalties Payable||$50,000||Earnings from subrights|
|Royalty Advances||$25,000||Earnings applied to advances|
|Royalty Expense||$10,000||Amounts offset against other titles (i.e. "joint accounted")|
|A/R-Authors||$4,000||Charges to authors' royalty accounts|
|Royalties Payable||$5,000||Reserves taken for this period|
|Royalties Payable||$7,000||Reserves reversed from prior periods|
|Cash||$148,000||Net of the above|
This entry should tie out to a subsidiary ledger which details this information by title.
Most large publishers have recently or will soon upgrade their royalty computer systems. The small publisher converting from a manual system to an automated one has the advantage of using the latest computer technology from the beginning. Unfortunately there still are not a lot of options. I am not aware of any stand-alone royalty packages, although most vendors include a royalty module as part of their complete order-processing system. Therefore, the choices that exist include installing a vendor's complete order-processing/royalty software, purchasing the royalty component of one of these complete systems, or designing and developing your own royalty software. There are pros and cons to each option, depending on your situation.
Many university presses are familiar with the Cat's Pajamas system (CPJ), which has a royalty system integrated into its order-processing software. There are limited options for customization, but since the primary benefit of CPJ is ease of use, it's hard to complain about the limited options. Other vendors that I am aware of at this time include MetaComet Systems, Inc. of South Hadley, MA; Computing Information Systems, Inc. (CIS.PUB) of Phoenix, AZ; Global Turnkey Systems, Inc. of Waldwick, NJ; VISTA of Iselin, NJ; CSSC of Edison, NJ; and Mercedes Data Systems of Brooklyn, NY. The options for customization with these vendors are greater, but their systems are also more complex.
A more complicated option is to purchase the royalty module from one of the above vendors to attach to your existing order-processing system and/or to process sales data received in electronic form from a distributor. Having just gone through this process (as well as setting up CPJ in a prior life), I can offer the following pieces of advice:
- Don't attempt to undertake this option unless you have a good technical person on staff in your company.
Prior to signing a contract:
- Check references of current users, and visit user sites if possible.
- Develop a detailed written list of requirements. Discuss your requirements with someone at the vendor who is knowledgeable about royalties (we found that, as in the rest of the industry, royalties are often almost an afterthought of the vendor, and not many of their staff are familiar with that part of their system). Be sure to:
- Get samples of royalty statements generated by the system and include any modifications you wish to make to the statements in your contract (Do you want to show foreign rights income by licensee? Do you want to show cumulative earnings and sales? etc.). Make sure that the vendor considers the system requirements generated by your royalty statement. It's a good idea to develop a sample of a complex royalty statement and include it as an exhibit in the contract.
- Consider your other requirements as well (Does it calculate reserves automatically? Can it handle joint accounting of titles? Will it interface to your general ledger? etc.).
- Insist that the vendor spend some time at your location during the development/installation process. It is very difficult to manage this activity over the phone.
- Thoroughly test the system prior to going live. It is better to delay going live than to start up with "just a few more modifications outstanding." Any programming on the system invariably causes minor bugs that have to be worked out. You risk delayed statements and a lot of extra work correcting mistakes if you go live before the system is complete.
- Allow a lot of time to enter data on contracts, royalty recipients, sales history, etc., prior to going live.
- Installing or upgrading a royalty system is a tremendous amount of work. However, the ease of processing royalties (especially compared to a manual system) and the potential for improvement in author satisfaction definitely makes it worth the effort.