Best Way To Do Merch Accounting
The best way to account for income pocketed directly by an artist/payee (typically merch, but could be anything), is to create two transactions - one for the income (positive) and another transfer (negative) - where the amount for each is the total income pocketed by the artist/payee.
The magic of this method is that it a) reflects that this income did indeed occur for the artist/release/item in question, b) uses the split on the contract to properly break down the income instead of using a made up "wholesale" amount, and c) the balance that results acts as either an advance to that artist/payee in the case of a release that is or will likely recoup, OR makes it easy for the catalog to request that some/all of the pocketed income be shared with the catalog, in the case of a release that is unlikely to recoup.
E.g. here's how a single $20 merch sale on a 50/50 split contract breaks down when accounted as both income and a transfer:
$20 income <-- collected by the artist/payee, but input as if received by catalog
= $10 artist/payee share
-$20 transfer <-- to reflect that the artist/payee, not the catalog, collected the income
= -$10 artist/payee balance
... which is correct: the artist/payee owes the catalog $10, or 50% of the $20 sale they pocketed. If the record is recouped, this will just get deducted from the royalties otherwise owed them; if not the artist could be asked to remit a payment back to the catalog.
This is the best way because it most accurately reflects what happened. A record was sold for $20, and is ultimately split between the artist and catalog $10/$10. Recoup status is automatically factored in, and it works for any split, not just 50/50.
Note! This way of doing things is neither ‘royalty bearing’ nor ‘non-royalty bearing,’ fancy contractual terms sometimes used to describe how to handle merch sales. If the contract in question has such terms, please advise and we’ll follow them to the letter. This way side-steps that whole question.
Another way is to account wholesales as transfers only. Say a $20 list price merch item is "sold" by the catalog to the artist at a wholesale price $10/unit, but the catalog doesn't actually collect this money, instead wanting to account is as an advance:
= $0 artist/payee share
= -$10 artist/payee balance
... same bottom line as above, but in this case there’s no evidence of the sale; it's just a -$10 transfer, as if the artist was advanced $10. This also makes it harder to determine what the artist/payee owes the catalog if indeed they need to be paid back. You could make a note in the memo about the transfer being for merch, but the income won't be accounted as part of the Artist, Release, or Item stats or analytics.
If we try to do the *wholesale* amount instead of list amount as both income and transfer, our $20 merch table sale ends up crediting the artist more than the catalog:
$10 in `income`
=$5 owed to artist
= -$5 owed to catalog
...which isn’t an actual 50/50 split. The artist is ultimately pocketing $15, the catalog only getting $5