Prorated: Meaning, Use Cases, and Example Calculations
Learn what prorated is and how it can be applied to everyday calculations.
Prorated Meaning
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. Other common use cases for prorated calculations are:
- Dividends per share for investors
- Insurance premiums
- Interest rates
- Taxable income
Prorated is a synonym of the term, “pro rata,” which implies that people receive a share of the total in some way. Understanding how prorated terms work is important for people from all walks of life; being able to advocate for yourself if you’re owed more or challenge a utility provider that’s overcharging you is dependent on understanding the meaning of prorated.
How Does Proration Work
Throughout life, you’ll face multiple instances that rely on proration to calculate the amount of funds that need to be exchanged. It’s easiest to understand the meaning of “prorated,” by breaking it down in a real-world example.
Let’s say you move into an apartment on March 15th. Instead of paying a full month’s rent, you probably only want to pay for half of that month that you were actually living in the apartment.
To figure out how much you owe, you would first look at how many days there are in March, which is 31. Then, knowing that your full month’s rent is $1,200, you can figure out that amount on a daily basis.
$1,200/31 = $38.7 per day.
If you moved in on the 15th, you lived in the apartment for 16 days. 16 x $38.7 = $619.20, which is how much you’d owe for that month. This is a common use case of a prorated calculation.
How to Calculate Prorated Figures
Looking at the equation for prorated figures as a whole, you’ll need to understand a few different variables: the number of days or items that were used, the maximum possible amount of days or items, and the value assigned to each. Then, the calculation is a quick two-step maneuver:
- Number of Items or Days / Maximum Number of Items or Days = Unit Value
- Unit Value x Quantity of Days or Items = Prorated Amount
Written out, it can seem a bit confusing, but once you’re comfortable with common use cases that fall under the “pro rata” umbrella, the calculation exercises become easier and more intuitive.
Common Prorated Use Cases
As mentioned, there are many instances that use proration today. You’ve probably already come across it at some point in your life without realizing it. If that’s not the case, don’t panic. We’ll break down some of the most common use cases of proration.
Dividends Per Share
If you’ve ever bought a stock that pays dividends, chances are you’ve unknowingly encountered prorated dividend payments. If you own 5 shares and someone else owns 100 shares, thanks to prorated calculations, you won’t get the same dividend payout.
Say the company you bought stock in has 500 shares outstanding that they’ve committed to paying $1 per share on. You own a much smaller slice of the pie than the other person, so you’ll get less of a payout.
Based on the simple prorated distribution of $1 per share, the company will pay you $5 and the other person in this example $100.
Utility Payments
Similar to rent, you might start using gas and electricity part of the way into the month when you move into a new apartment. Depending on how your utility provider bills its customers, they will likely charge you a prorated amount for your partial usage within the month.
Utility providers can use different methods to charge their customers; some offer users the option to be charged a daily average rate each month or an exact amount based on what the meter reads.
For this example, let’s say you’re being charged a daily average rate of $10. You turn on the utilities on the 14th of the month and the billing cycle restarts on the 1st of next month. You’ll pay $10 x 17 remaining days for a total of $170. Next month, your bill will be higher, going up to $300 because you’re paying for the full 30 days.
With utilities, you are often provided the bill calculations in your monthly statement. This information will break down the exact calculation used to charge you for that month, and by understanding prorated calculations, you can double-check the work to ensure you aren’t being overcharged.
Employee Wages
In this example, let’s pretend that you got an exciting new job at your dream company. They are going to pay you a whopping $200,000 per year, and you can’t wait to see that money come in. However, you didn’t start your job until August 1, so they won’t pay you the full $200,000 in year 1.
Your employer will likely use prorated calculations to determine what your salary will be for August 1 until the end of the year. They might pay you once every two weeks or once a week, but the overall amount you’ll receive at the end of the year won’t change – it’s all based on how many days you’ve worked out of the possible working days in a year.
Insurance Premium Prorated Payments
Usually, car insurance providers charge customers based on a 6-month fee. While you can pay it monthly, the fee is determined on a semi-annual basis. If your car insurance quote was $750 for 6 months, you would expect to pay $125 per month.
However, if after just over three months, you were unhappy with your provider, you could cancel, and they would refund the third month’s payment on a prorated basis. Let’s see what that would look like:
- In month 3, you paid $125 but decided to cancel your insurance contract 12 days into the month.
- The month has a total of 30 days.
- You would receive a refund for the remaining 18 days of the month.
Daily fee for month 3: $125/30 = $4.17
$4.17 x 18 days remaining = $75.06
In this case, you are due a refund of $75.06. Be sure to check with your insurance provider to see if they offer prorated refunds as many of them do.
Prorated Vacation Time
When employers offer paid time off as part of their compensation package, they have to systematically track how many days each employee gets as part of that package. Often, employers will offer new employees 15 days a year of paid vacation time. But what happens if you get hired at the beginning of June and only work 7 months?
You won’t get a full 15 days that year. Instead, take the 15 annual vacation days and divide by 12 which is the total number of months in a year. This gives you a prorated value of 1.25 vacation days a month.
Next, multiply 1.25 by 7 working months, which gives you 8.75 days of paid vacation days for the year. Your employer will likely round this value up to 9 days.
Prorated Rent When Moving Out
Prorated rent calculations can be used when you move in and when you move out, too. If your landlord usually collects rent on the first of every month, but you’re moving out on the 16th, they’ll charge you a prorated amount for the last month.
If your monthly rent is $1,500 and in the month of August – your move-out month – you’re only staying for 16 days, use the following calculation to determine your payment amount:
$1,500/31 days in the month = $48.39 per day.
Then take $48.39 x 16 days which is $774.24.
Prorated FAQ
Q: What does prorated rent mean?
A: Prorated rent is used when a tenant moves in mid-month or moves out mid-month. Usually, landlords have their tenants pay their monthly rent on the same day for tracking purposes, so if you move in two weeks before the next rent cycle, your landlord will charge you prorated rent, and you’ll only pay for those two weeks at first. When the next billing cycle starts, you’ll pay for each month in full.
Q: Are prorated and pro rata the same thing?
A: These two terms are synonyms and can be used interchangeably.
Q: Can prorated amounts be used to calculate discounts?
A: Absolutely. For example, subscription services may offer prorated billing fees to customers who join mid-month.
Additional Resources
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