by Minimum Rent or Dead Rent is often used to ensure that the landlord (lessor) receives a guaranteed payment. However, some situations might not involve directly maintaining a Minimum Rent Account but still involve accounting for short workings and recoupment. Recoupment methods can vary, but the two most common are Fixed Recoupment and Floating Recoupment.
Fixed Recoupment Method:
Under the Fixed Recoupment Method, the lessee is allowed to recoup short workings only within a fixed period (e.g., two or three years). If the short workings are not recouped within this period, the lessee loses the right to recover them.
Example:
- Minimum Rent: ₹100,000
- Actual Royalty (Year 1): ₹80,000 (Short Workings: ₹20,000)
- Actual Royalty (Year 2): ₹120,000 (Recoupment of ₹20,000 from Year 1)
- Actual Royalty (Year 3): ₹90,000 (Short Workings: ₹10,000)
In this method, the lessee can only recoup the short workings from Year 1 within a fixed period (e.g., two years).
Journal Entries in the Books of the Lessee (Fixed Recoupment Method)
Year 1: Actual Royalty is Less than Minimum Rent (Short Workings)
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 1 | Royalty Account Dr. | 80,000 | – |
| To Lessor’s Account | — | 80,000 | |
| (Being actual royalty payable to lessor) | – | – | |
| Short Workings Account Dr. | 20,000 | – | |
| To Lessor’s Account | – | 20,000 | |
| (Being short workings transferred) | – | – | |
| Lessor’s Account Dr. | 100,000 | – | |
| To Bank Account | – | 100,000 | |
| (Being payment made to lessor) | – | – |
Year 2: Actual Royalty Exceeds Minimum Rent (Recoupment of Short Workings)
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 2 | Royalty Account Dr. | 120,000 | – |
| To Lessor’s Account | – | 120,000 | |
| (Being actual royalty payable to lessor) | – | – | |
| Short Workings Recouped Account Dr. | 20,000 | – | |
| To Short Workings Account | – | 20,000 | |
| (Being short workings recouped from Year 1) | – | – | |
| Lessor’s Account Dr. | 120,000 | – | |
| To Bank Account | – | 120,000 | |
| (Being payment made to lessor) | – | – |
Year 3: Short Workings Again
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 3 | Royalty Account Dr. | 90,000 | – |
| To Lessor’s Account | – | 90,000 | |
| (Being actual royalty payable to lessor) | – | – | |
| Short Workings Account Dr. | 10,000 | – | |
| To Lessor’s Account | – | 10,000 | |
| (Being short workings transferred) | – | – | |
| Lessor’s Account Dr. | 100,000 | – | |
| To Bank Account | – | 100,000 | |
| (Being payment made to lessor) | – |
Ledger Accounts in the Books of the Lessee (Fixed Recoupment Method)
- Royalty Account
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 1 | Lessor’s Account | 80,000 | – |
| Year 2 | Lessor’s Account | 120,000 | – |
| Year 3 | Lessor’s Account | 90,000 | – |
- Short Workings Account
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 1 | Lessor’s Account | 20,000 | – |
| Year 2 | Short Workings Recouped Account | – | 20,000 |
| Year 3 | Lessor’s Account | 10,000 | – |
- Lessor’s Account
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 1 | Royalty Account | 80,000 | – |
| Year 1 | Short Workings Account | 20,000 | – |
| Year 1 | Bank Account | – | 100,000 |
| Year 2 | Royalty Account | 120,000 | – |
| Year 2 | Bank Account | – | 120,000 |
| Year 3 | Royalty Account | 90,000 | – |
| Year 3 | Bank Account | – | 100,000 |
- Short Workings Recouped Account
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 2 | Short Workings Account | 20,000 | – |
- Bank Account
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 1 | Lessor’s Account | – | 100,000 |
| Year 2 | Lessor’s Account | – | 120,000 |
| Year 3 | Lessor’s Account | – | 100,000 |
Floating Recoupment Method
Floating Recoupment Method, the lessee can recoup short workings from any future period as long as the actual royalties exceed the minimum rent. This method provides greater flexibility compared to the fixed method, as there is no time restriction on recoupment.
Example:
- Minimum Rent: ₹100,000
- Actual Royalty (Year 1): ₹80,000 (Short Workings: ₹20,000)
- Actual Royalty (Year 2): ₹90,000 (Short Workings: ₹10,000)
- Actual Royalty (Year 3): ₹120,000 (Recoupment of ₹30,000 from Year 1 and Year 2)
Journal Entries in the Books of the Lessee (Floating Recoupment Method)
Year 1: Actual Royalty is Less than Minimum Rent (Short Workings)
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 1 | Royalty Account Dr. | 80,000 | – |
| To Lessor’s Account | – | 80,000 | |
| (Being actual royalty payable to lessor) | – | – | |
| Short Workings Account Dr. | 20,000 | – | |
| To Lessor’s Account | – | 20,000 | |
| (Being short workings transferred) | – | ||
| Lessor’s Account Dr. | 100,000 | – | |
| To Bank Account | – | 100,000 | |
| (Being payment made to lessor) | – | – |
Year 2: Actual Royalty is Less than Minimum Rent Again (Short Workings Continue)
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 2 | Royalty Account Dr. | 90,000 | – |
| To Lessor’s Account | – | 90,000 | |
| (Being actual royalty payable to lessor) | – | – | |
| Short Workings Account Dr. | 10,000 | – | |
| To Lessor’s Account | – | 10,000 | |
| (Being short workings transferred) | – | – | |
| Lessor’s Account Dr. | 100,000 | – | |
| To Bank Account | – | 100,000 | |
| (Being payment made to lessor) | – |
Year 3: Actual Royalty Exceeds Minimum Rent (Recoupment of Short Workings)
| Date | Particulars | Debit (₹) | Credit (₹) |
| Year 3 | Royalty Account Dr. | 120,000 | – |
| To Lessor’s Account | – | 120,000 | |
| (Being actual royalty payable to lessor) | – | – | |
| Short Workings Recouped Account Dr. | 30,000 | ||
| To Short Workings Account | 30,000 | ||
| (Being short workings recouped from previous years) | – | – | |
| Lessor’s Account Dr. | 120,000 | — | |
| To Bank Account | – | 120,000 | |
| (Being payment made to lessor) | – | – |
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