“What is pro-rata meaning in accounting terminoligies”?

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Author: Sarthak Bhalerao

Table of Contents

  1. What is Pro-Rata?
  2. Use of Pro Rata
  3. Example of Pro Rata
  4. Pro-Rata in Everyday Life

What is Pro-Rata?

Pro-Rata is a Latin Term – meaning “in proportion” that is used to assign value in proportion to something that can accurately be measured or calculated. If something is given out to people on a pro-rata basis, it means assigning an amount to one person according to their share of the whole. While a pro-rata calculation can be used to determine the appropriate portions of any given whole, it is often used in business finance. In North American countries, pro-rata is often referred to or preferred as “prorated”.

Use of Pro Rata

Pro-rata literally means the division of something to make up a whole. It doesn’t necessarily mean that all parts are equal, but that each piece is given value in proportion to something else. It is particularly useful when the exact value of something can’t be easily determined by itself but can easily be assigned a proportion value when compared to something else.

Example of Pro Rata

Let’s assume that Company ABC announces a $1,500,000 cash dividend for its shareholders. If the company owns 150,000 outstanding shares in the market, each dividend share is prorated to $10. The pro-rata amount is determined using a simple formula:

Per Share Dividend = Total Dividend Amount / Total Number of Outstanding Shares

Using this formula, we get the per-share dividend amount: 1,500,000 / 150,000 = $10 per share

Pro-Rata in Everyday Life

Even if you are not an investor or working in the financial sector, you will still encounter pro-rata at some point in your life. For example, if you’re moving into an apartment on any day other than the first day of the month, then your landlord is likely to pro-rate your rent for the month.

They will do so by dividing the total monthly rent due by the number of days in the month to determine the amount of the rent that is proportionate to each day. They will then multiply that amount by the number of days that you will be occupying the apartment that first month. Let’s say that you are moving on the 15th of October and your monthly rent is $700.

  1. Determine your pro-rated per day:

700/31 = $22.58

  1. Calculate pro-rata for the month:

$22.58 x 16 (no. of days of occupancy) = $361.28

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Sarthak Bhalerao

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