A royalty is a license payment. A singer or author, for example, creates a work, licenses it to a company to sell and receives a share of the sale proceeds. This may be a flat amount per sale or based on a percentage of the net or gross. Royalties earned but not paid are usually reported as assets by the creator and liabilities by the licensee.
If your business runs on a cash basis, you only report royalties when you receive the money. With accrual accounting, you create an entry in your accounts and on the balance sheet for royalties receivable. Like other accounts receivable, this tracks the royalties you've earned but haven't received. If you receive an advance against future royalties, you credit that to a royalty advance account. For example, if you get a $2,000 advance, then earn $500 in royalties, you'd reduce the advance account to $1,500 and credit $500 to royalties receivable.
Paying Royalties Out
Royalties payable are a liability on the licensee's balance sheet. If your company owes $10,000 in royalties but won't pay for a month, you report the $10,000 as a liability. When you pay the money, you reduce your cash assets and wipe out the liability. If royalties run in the negative -- due to returns of a book, for instance -- these go in a separate "unearned royalties" account. You list this on the balance sheet as an asset account.