The number one question we get asked at Label Engine in regards to accounting is “what is the ‘Accounts’ drop-down for”? To delve into the reasoning behind it, let me first explain two different accounting methods that labels commonly use for royalty allocations.
The first system is on a per-track basis. For each track, the label agrees with the artist (and the remixers if there are any) what percentage they should receive from the sale of each track. Usually, an original artist will receive 50% of an original mix with the label keeping the other 50%, and 10% to 25% of a remix of that track depending on the label’s policy, with a remixer receiving 25% to 40%, and the label again keeping 50%. It is usually the label’s responsibility to pay for mastering, artwork and promotion from their 50% share.
Let’s work through a simple example. Cash Records signs an original track by Lazy Rich and offers him 50% of sales. They also commission a remix by Monolythe offering 40% of sales, with 10% going to Lazy Rich. Cash Records pay $200 for mastering.
Once the sales come in, $3000 is received for the original mix and $1000 is received for the Monolythe remix. For the original mix, 50% is assigned to Lazy Rich with 50% assigned to Cash Records. For the remix, 10% is assigned to Lazy Rich, 40% is assigned to Monolythe and 50% is assigned to Cash Records.
Lazy Rich will receive ($3000*50%) + ($1000*10%) = $1600
Monolythe will receive ($1000*40%) = $400
Cash Records will receive ($3000*50%) + ($1000*50%) – $200 = $1800
The second system is on a per-release basis. The label agrees with the original artist what percentage they will receive of PROFITS from the sale of their track and accompanying remixes. Remixers are paid a flat fee instead of receiving a percentage of the royalties from their track. A tally, or “account” is kept of all expenses that are incurred putting the release together – this includes mastering, artwork, promotion and also remix fees. The original artist will then receive a percentage of this account, if and only if it is above zero. The label will retain the remaining percentage. Therefore, if the release sells less than the total cost of all remix fees, mastering, artwork and promotion then the original artist will not be owed anything – to protect the artist against this happening, a non-refundable advance may be paid to them upon signing the contract.
As you’ve seen above, allocating royalties for the first method is reasonably straight-forward, you can just enter the percentages that each artist or remixer is owed when the royalty is received. Occasionally the label may decide that the artist is responsible for all or a part of the distribution, mastering or promotional expenses, in which case an expense can be added and allocated to the artist, but how do you go about dealing with the second method?
To manage the second method, we introduced the concept of accounts. You can think of an account as a separate bank account you create specifically for a release, or if you like a separate stack of cash (because you can’t pay an artist a negative amount of cash). The account dropdown allows you to select an account for all transactions for an artist for a particular release – this account will appear separately on their statement, is only payable to the artist if it is above zero, and will not affect the amount owed to the artist from any other accounts.
Let’s work through an example the second method above, assuming the label (Cash Records) agrees to pay the artist (Lazy Rich) 50% of the profit from the release. Firstly, upon signing the contract, Cash Records agrees to pay Lazy Rich an advance of $500. To do this, after creating the release, they go to the statements and advances page, create a new account for Lazy Rich using the catalogue number CSH123 as the name (we recommend you always use the catalogue number as it will mean the account is suggested automatically for royalties received with that same number), and pay the advance to that account. Next, they commission a remix and agree to pay Monolythe $800. They enter an expense, selecting Monolythe as the client, and enter an item for $800 for the remix. They then assign 50% of that expense to Lazy Rich’s account CSH123, and the other 50% to Cash Records. Next, they pay a mastering company $100 to master each track, and do so by creating another expense, and add an item for $200 of mastering expenses, with 50% allocated to Lazy Rich’s account CSH123, and 50% allocated to Cash Records.
Once the sales come in, $3000 is received for the original track and $1000 is received for the Monolythe remix. For the original mix, 50% is allocated to Lazy Rich’s account CSH123, and 50% is allocated to Cash Records. For the remix, again 50% is allocated to Lazy Rich’s account CSH123 and 50% is allocated to Cash Records (remember Monolythe were paid a remix fee upfront).
So, it’s now the end of the quarter and time to send Lazy Rich a statement. Lazy Rich’s account CSH123 looks as follows:
Advance Paid -$500
Monolythe Remix Fee -$800*50% = -$400
Mastering Fee -$200*50% = -$100
Original Track Royalties $3000*50% = $1500
Monolythe Remix Royalties $1000*50% = $500
Lazy Rich CSH123 Total $1000
Meaning, an additional $1000 is owed to Lazy Rich this statement. This will be irrespective of any other royalties Lazy Rich is owed from Cash Records.
From this release Cash Records will make (-$800*50%)+($-200*50%)+($3000*50%)+($1000*50%) = $1500
(In case you are wondering, in the first example both Lazy Rich and Cash Money made more money because Monolythe was paid on a percentage basis as opposed to a flat fee, but remember that Monolythe will continue to make money from sales each quarter).
Obviously, how you decide to do your accounting is up to you, there are lots of variables to manage and it can take a long time to figure out exactly what system works best for you. We recommend that when starting your label you use the first system as this is the simplest to manage and offers the lowest risk (Were sales of CSH123 not to have come through, Cash Money would have lost the $1000 remix fee they paid Monolythe, plus the $500 advance they paid Lazy Rich, plus the mastering fee!) Although the accounts drop down may not be useful for a large proportion of accounting users, we do hope that this example has clarified exactly what the account drop down is and what it can be used for.