Adjusted for a specific time period
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What is Prorated?
In accounting and finance, prorated means adjusted for a specific time period. For example, if an employee is due a salary of $80,000 per year, and they join the company on July 1, their prorated salary for that year would be $40,000.
How to Prorate a Number
Let’s look at an example. Susan is supposed to earn $30 per hour, paid to the nearest minute. She works 47 minutes. What is her prorated compensation?
To calculate the answer, follow the steps below:
- Take her hourly rate of $30 and divide it by 60 to find her rate per minute.
- Multiple her rate per minute by 47 to arrive at the answer:
= ($30 / 60) x 47 = $23.50
Download CFI’s free Prorate Calculator.
When is Prorating Used?
There are many examples of times when a prorated number is required. Let’s review a list of the most common situations.
Examples include:
- When an employee worked for less than a year
- When an employee worked for less than a month
- When a contractor worked for less than an hour
- When a monthly subscription began mid-month
- When a utility company bills for less than a full month of service
- When a tenant moves into a rental space mid-month
While there are lots of situations that require prorating numbers, there are also many instances where numbers are not prorated. One of the most common is that of payment of stock dividends. Shareholders are paid a dividend based on the date of record when they became shareholders, not based on how long they have owned their shares. Everyone who is a shareholder as of the date of record receives the same dividend amount per share when they are paid.
Using Prorated in a Conversation
Here is an example of a conversation between an Analyst (A) and a Vice President (VP), talking about numbers in a financial model.
VP: Did you update the model to include the new office lease figures?
A: Yes, I increased the office rent number to reflect the higher rate starting in July.
VP: Did you prorate it?
A: Yes, I prorated it based on a move-in date of July 23.
VP: Okay great, thanks!
Additional Resources
CFI is the official global provider of the Financial Modeling and Valuation Analyst (FMVA)®designation, a leading financial analyst certification program. To continue learning and advancing your career, the following additional CFI resources will be helpful:
FAQs
To prorate is to divide something in a proportional way, based on time. If your new landlord prorates your first month's rent, she only charges you for the days you've actually lived in your apartment.
What does it mean when something is prorated? ›
: divided, distributed, or assessed proportionately (as to reflect an amount of time that is less than the full amount included in an initial arrangement) The catch is that the Dolphins can get back the prorated portion of the $5 million if Madison defaults on the contract.
What is a prorated payment? ›
Prorated charges ensure that customers are billed only for the number of days that they actually used the service. Proration is primarily popular for subscription-based companies, as they rely on yearly or monthly recurring revenue and allow customers to change their subscriptions during their billing period.
What does prorate stand for? ›
Pro rata means proportionally, such as dividends awarded to investors based on their proportion of investment. The concept of pro rata is rooted in fractions because proration attempts to make two fractions equal to each other but with different denominators.
What does prorated work mean? ›
The meaning of prorated is to adjust something, often a price or amount, and distribute it evenly over a period of time. If you prorate a product or service, it means you assign an amount proportionate to the whole share. For example, suppose you remove, add, or cancel a service in the middle of a billing period.
What is my prorated pay? ›
A prorated salary is when you divide an employee's wages proportionally to what they actually worked. Prorating an employee's salary only applies to salaried workers. Hourly workers don't receive predetermined wages. Instead, hourly workers earn wages for the hours they work during a pay period, which can fluctuate.
Is prorated a refund? ›
Pro Rata Refund means a refund of tuition that has been paid for a portion of the program beyond the last recorded date of attendance.
What is an example of prorated billing? ›
Prorated Billing Example
An example of prorated billing is when a customer upgrades from a lower-tier plan to a higher-tier plan or vice versa. For example, a customer always pays for a particular subscription plan on the 1st of the month.
What is the prorated rule? ›
The pro-rata rule is the formula that is used to determine how much of a distribution is taxable when the account owner holds both after-tax and pre-tax dollars in their IRA(s). For the purposes of the pro-rata rule, the IRS looks at all your SEP, SIMPLE, and Traditional IRAs as if they were one.
How do you avoid prorated charges? ›
How to calculate prorated charges and credits. Changing your plan or features may result in prorated charges or credits if the change is effective in the middle of your bill cycle. To avoid prorated charges, schedule plan or feature changes to start on the first day of your next billing cycle.
Prorated billing is a method of bill calculation based on a partial period of service rather than a full billing cycle. It lets customers pay for the portion of the service period they use and not the entire service period, which makes billing more accurate.
Does prorated mean half? ›
Prorated means to divide or distribute proportionately. In short, the meaning of prorated is splitting a numeric value based on the proportion of time passed in the relevant time frame. Commonly used in financial situations, prorated fees may be assessed for a partial month's rent or an employee's wages.
What is a synonym for prorated amount? ›
according to the calculated share. ad valorem. correlatively. in proportion. proportionately.
What does prorated payment mean? ›
Proration sounds complicated, but it's actually a very simple concept. Essentially, if you use something for less time than you're scheduled to use it for, it's fair to expect that you'll only be charged for the time you used. That's essentially what we mean by a prorated charge, or prorated amount.
What does prorated mean for dummies? ›
To prorate is to divide something in a proportional way, based on time. If your new landlord prorates your first month's rent, she only charges you for the days you've actually lived in your apartment.
Why do we use prorated? ›
Prorated definition
Essentially, if you use something for less time than you're scheduled to use it for, it's fair to expect that you'll only be charged for the time you used. That's essentially what we mean by a prorated charge, or prorated amount.
Does prorated mean discount? ›
When a promotion is prorated, it is divided and allocated among items according to the percentage of each product in the cart, determined by their values. That is, the higher the product's price, the higher the percentage of nominal discount it will receive.
What is an example of a prorated bill? ›
An example of prorated billing is when a customer upgrades from a lower-tier plan to a higher-tier plan or vice versa. For example, a customer always pays for a particular subscription plan on the 1st of the month.
What does pro-rated mean in rent? ›
Prorated rent is rent that's calculated based on the number of days of a month a tenant stays in a rental. Basically, it's a way for landlords to fairly charge renters who don't stay in a rental property for a full month. Prorated rent is often used when a tenant moves in or out during the middle of the month.
What is a prorated item? ›
Proration is defined as the act of dividing property taxes, interest, insurance premiums, rental income, etc., between buyer and seller proportionately to time of use or the date of closing. In a typical sale/purchase closing, the item most routinely prorated is the ad valorem taxes for that year.
