Journal Entries and Ledger Accounts Including Minimum Rent Account

Minimum Rent (also known as Dead Rent) is a guaranteed payment that the lessee (tenant) must make to the lessor (landlord) irrespective of the actual production or sales. If the actual royalty based on production or sales exceeds the minimum rent, the lessee will pay the higher amount. However, if the royalty is lower than the minimum rent, short workings occur, which may be recouped in future periods when the actual royalty exceeds the minimum rent.

In this explanation, we will cover the journal entries and ledger accounts in the books of the lessee that include minimum rent, royalty, short workings, and recoupment of short workings.

Key Terms:

1. Minimum Rent (Dead Rent):

The fixed payment that the lessee must pay regardless of production.

2. Actual Royalty:

Royalty payment based on the actual production or sales.

3. Short Workings:

The difference between the minimum rent and actual royalty when the actual royalty is less than the minimum rent.

4. Recoupment of Short Workings:

Recovering short workings in future periods when actual royalty exceeds minimum rent.

Example Scenario

• Minimum Rent: ₹100,000
• Actual Royalty for Year 1: ₹80,000 (Short Workings: ₹20,000)
• Actual Royalty for Year 2: ₹120,000 (Recoupment of Short Workings: ₹20,000)

Journal Entries in the Books of Lessee:

Year 1: Actual Royalty is Less than Minimum Rent (Short Workings)

Year 2: Actual Royalty Exceeds Minimum Rent (Recoupment of Short Workings)

Ledger Accounts in the Books of Lessee

1. Minimum Rent Account

2. Royalty Account

3. Short Workings Account

4. Lessor’s Account

5. Short Workings Recouped Account

6. Bank Account

Explanation of Journal Entries

1. Year 1 (Short Workings):
   • The Royalty Account is debited with the actual royalty amount (₹80,000), and the Lessor’s Account is credited.
   • The Minimum Rent Account is debited with the guaranteed minimum rent (₹100,000), and the lessor is credited again.
   • The shortfall of ₹20,000 (short workings) is recorded by debiting the Short Workings Account and crediting the Minimum Rent Account.
   • The total amount due to the lessor is paid by debiting the Lessor’s Account and crediting the Bank Account.
2. Year 2 (Recoupment of Short Workings):
   • The actual royalty exceeds the minimum rent, so ₹120,000 is debited to the Royalty Account and credited to the Lessor’s Account.
   • The Minimum Rent Account is debited with ₹100,000, reflecting the minimum amount payable.
   • The Short Workings Recouped Account is debited with ₹20,000 (the amount of short workings recouped), and the Short Workings Account is credited.
   • Finally, the total payment of ₹120,000 is made to the lessor.