What kind of expense should the royalties paid to be reported as? - ProProfs Discuss
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What kind of expense should the royalties paid to be reported as?

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years.

Asked by Bailey, Last updated: Aug 21, 2023

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John Smith

John Smith

John Smith
John Smith

Answered Sep 12, 2016

In the period incurred. -under accrual accounting, events that change an entitys financial position are recorded in the period in which the events occur. this means revenues are recognized when earned rather than when cash is received, and expenses are recognized when incurred rather than when cash is paid. therefore, when the royalties are paid, wand should debit an asset account (prepaid royalties) rather than an expense account. the royalties paid should be reported as expense in the period incurred (by debiting royalty expense and crediting prepaid royalties).
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