Accounting for Royalty Payments: Carrying Balances Forward

A common request from our customers is for an explanation of how balances are carried forward when accounting for royalty payments in Royalty Tracker.  In this article, we’ll explore the reasons that balances can be carried forward and clarify how they work.

What Does It Mean to Carry a Balance Forward?

A “Balance Forward” is when an amount due to, or owed by, a royalty recipient is not paid for the current royalty period.  Instead, it is “carried forward” to the next royalty period.  There are four main reasons that balances can be carried forward:

• Minimum Payment Thresholds
• Advances
• Excess Returns or Other Expenses
• Unpaid Royalties

Minimum Payment Thresholds

A minimum payment threshold is the amount that a royalty recipient must earn before you send them a payment.  This helps ensure that small payments, which often cost more to process than the value of the payment, are not paid until the recipients’ balances reach the threshold.  The minimum payment threshold is set on the first page of the contract tab.

To help better illustrate, consider for example a company that pays monthly royalties, and has a minimum payment threshold of $50.  If in January only $40 is owed in royalties, then that balance will be carried forward to February.  The recipient’s February statement will then show a $40 “Balance Forward” from the prior period.  If they then earn another $10, they will have hit the threshold and their royalty amount of $50 will be due since it meets the minimum payment threshold.

Advances

Another reason that a royalty recipient may see a “Balance Forward” on their statement is due to advances.  Many companies pay an advance against future royalties.  Until this advance is earned out, the unearned balance will appear as a negative balance forward when accounting for royalty payments.

Consider for example an author that was paid a $1,000 advance against future royalties, and who receives quarterly royalty statements.  If the advance was paid in Q1 with no other activity, then on their Q2 statement they will see a “Balance Forward” (often labeled as an “Unearned Advance”) of -$1,000.

If in Q2 they earn $200 worth of royalties, then on their Q3 statements they will see a “Balance Forward” of -$800 (-$1,000 + $200 = -$800).

Once the advance has been paid off, then this Balance Forward will no longer appear on the statement.

Advances are entered on the “Expenses and Adjustments” tab of the contract.

Excess Returns and Other Expenses

Closely related to Advances are other expenses associated with a royalty recipient, including “excess returns”.  An excess return is when returns of a product for a period exceed sales.  This will often happen when a product does not sell as well as expected, and several months later is returned.

When accounting for royalty payments, Royalty Tracker creates an expense to recoup the excess returns against future sales.  This will show as a negative balance forward on the royalty statement.  Royalty Tracker actually can help protect against this by enabling you to withhold a “Reserve Against Returns”.  Not all contracts enable this, but if yours do, we encourage you to take advantage of this feature.

Similarly, other expenses, for example wire transfer fees, which are charged against the royalty recipient, can yield a negative balance forward.

Unpaid Royalties

Unpaid royalties cause a balance to be carried forward as well when accounting for royalty payments. If you have royalties due to an author for a prior period but have not yet paid them, then at the beginning of the next royalty period the author starts with the prior balance that was carried from the previous period into the new period.

Consider for example an author who has changed their address without informing you.  You may put that author on hold and carry forward their royalty balances until you get their correct address.  In that case, their prior royalties due will appear on their royalty statement as a “Balance Forward”.

If you have any questions regarding carrying a balance forward, or any other technical issues you are having with Royalty Tracker please call MetaComet’s expert support team.

Support can be reached at 413-536-5989 x3 or [email protected]