Reserve for Returns

The reserve for returns clause in many contracts allows the licensee (publisher) to withhold a portion of royalties earned to account for future returns from sales made during the royalty period. This reduces the chance that royalties will be paid on unrealized sales.

The reserve is withheld for one or more royalty periods; usually one, and usually recovered over a single periods. Publishers that pay royalties monthly or quarterly may withhold reserves for 6 to 12 months.

The general ledger entry

Reserves are a delay in payment, not a reduction in the royalties earned. As such they are shown as a liability, and royalty expense is not reduced.

Period 1: 10% Reserve is withheld

Account Type Debit Credit
Royalty Expense Expense $ 1,000
Royalties Payable Liability $ 900
Reserves Liability (Withheld) Liability $ 100

Period 2: 10% Reserve is withheld and Period 1 reserve is released

Account Type Debit Credit
Royalty Expense Expense $ 2,000
Royalties Payable Liability $ 1800
Royalties Payable Liability $ 100
Reserve Liability (Withheld) Liability $ 200
Reserve Liability (Released) Liability $ 100

Royalty Software Application

The Easy Royalties software allows users to have multiple reserve rules. These rules can be based on product format, sales type or the royalty rule that applies to the sales record. Many companies do not withhold any reserves on digital products. Some publishers have higher reserve rates on sales to specific types of customers.

Royalty Software Reserves

Royalty statements can display a summary of reserves withheld and their futre recovery date.

Royalty statement reserve summary

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