How to Prorate Salary, Rent, Refund, Bill, Interest Rates, Share Dividends & More | Complete Guide

Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

Contents

Keep reading for everything you need to know about prorating:

1. **What** does it mean when something is **pro rata** or **prorated**?

2. **How** do you **calculate** pro-rated?

3. **Examples**: How do you use pro rata in **real-life**?

(Spoiler *alert*: You’ll see how to prorate a salary, rent, bill, subscription, refund, interest rate, dividends – and more.)

Definitions: Pro Rata - Prorate - Prorated | |
---|---|

Pro Rata (adjective or adverb) | Pro Rata means certain total amount (e.g., payment, cost, price, fee) distributed in equal portions or in proportion to some factor (e.g., time period, partial usage or consumption). |

Prorate (verb) | Prorate means a process of determining and proportionally allocating the pro rata portions as a share of any given whole (i.e., pro rata calculation). |

Prorated (adjective) | Prorated means calculated and divided on a pro rata basis of proportional distribution with the aim of assigning an amount to each party according to their fair share in proportion to the whole. |

How do you calculate a pro rata rate? Let’s take a look at an example to learn by doing:

*Calculation Example: Prorated Salary: Employee Worked For <1 Year (Start of Employment)*

John was hired as a financial controller at an annual salary of $104,000 and will start working in the last week of December 202X.

What is John’s prorated salary in his new job for December 202X?

Follow the two steps below to calculate John’s prorated salary:

Step | Explanation | Calculation |
---|---|---|

Step #1 | Calculate John’s hourly rate by dividing his annual salary ($104,000) by the number of annual work hours (assuming 1 year = 52 weeks x 40 working hours per week = 2,080) | $104,000 / 2,080 = $50 per hour |

Step #2 | Multiply John’s hourly rate by 40 (because John worked for one full 40-hour work week with his new employer) | $50 x 40 = $2,000 |

The pro-rated compensation John earned in the last week of year 202X was $2,000.

You may be surprised how often we use prorating in our daily lives – not just in the context of business, finance or law.

The most common situations when pro rata calculations are used include:

- Salaries and wages
- Rent
- Bill and subscriptions
- Refunds and cancellations
- Dividends for stock shares
- Insurance premiums and policies
- Interest rates
- Cost accounting
- Law and liability

Payroll needs to be pro-rated in a number of different situations, including:

- Commencement or termination of employment in the middle of a pay period
- Pay increase in the middle of a pay period
- Unpaid leave
- Contractor pay per hour/minute

In order to calculate the prorated salary amount, you first take the total annual salary and divide it by the number of working days in the year to determine a daily rate.

Next, your multiply the daily rate by the number of days the employee was working to calculate the prorated amount for the partial month.

Prorated Salary** =**

( Annual salary** /** Number of working hours in the year )

**x** Number of hours employee worked and is being paid for

*Calculation Example #1: Prorated Contractor Pay: Contractor Worked For <1 Hour*

Jane works as an on-call lawyer at an hourly rate of $120.

As a part-time contractor, Jane is paid by the minute.

What is Jane’s prorated pay if she worked for 45 minutes this week?

Follow the two steps below to calculate Jane’s prorated contractor pay:

Step | Explanation | Calculation |
---|---|---|

Step #1 | Calculate Jane’s per-minute rate by dividing her hourly rate ($120) by 60 (because 1 hour = 60 minutes) | $120 / 60 = $2 per minute |

Step #2 | Multiply Jane’s per-minute rate by 45 (because Jane worked for 45 minutes) | $2 x 45 = $90 |

The pro-rated compensation Jane has earned this week is $90.

*Calculation Example #2: Prorated Salary: Employee Worked For <1 Year (Termination of Employment)*

On 1 July 202X, Jane was hired as a full-time lawyer at an annual salary of $120,000.

What is Jane’s prorated salary for the year 202X?

Follow the two steps below to calculate Jane’s prorated salary:

Step | Explanation | Calculation |
---|---|---|

Step #1 | Calculate Jane’s monthly salary by dividing her annual salary ($120,000) by 12 (because 1 year = 12 months) | $120,000 / 12 = $10,000 per month |

Step #2 | Multiply Jane’s monthly salary by 6 (because Jane worked for 6 months) | $10,000 x 6 = $60,000 |

The pro-rated compensation Jane earned in year 202X was $60,000.

For example, prorated rent may apply when:

- Tenant moves in or out of a rental space mid-month
- Tenant moves out before the last day of the month when the lease expires on the first day of the month
- Tenant needs to stay one or two days beyond the end of the lease term

For instance, if a tenant paying a full monthly rent of $1,200 is moving out on 5 June, the prorated rent amount for the month of June would be $200, calculated as:

*( $1,200 monthly rate amount / 30 days ) x 5 days = $200.*

Prorated Rent **=**

( Monthly rent** /** Number of days in the month )

**x** Number of days renter is paying for

Jane has rented a new apartment for $1,200 per month and is moving in on the 21st day of the month. There are 30 days in that particular month.

Jane’s new landlord will prorate her monthly rent for the first 10 days on her lease. In other words, Jane will pay 10 days’ worth of rent in the first month occupying her new apartment.

What is Jane’s prorated rent for the first month?

Follow the two steps below to calculate Jane’s prorated rent:

Step | Explanation | Calculation |
---|---|---|

Step #1 | Calculate Jane’s daily rent by dividing her monthly rent ($1,200) by 30 (because there are 30 days in the month Jane is moving in) | $1,200 / 30 = $40 per day |

Step #2 | Multiply Jane’s daily rent by 10 days (because Jane will only be occupying the apartment for 10 days in the first month) | $40 x 10 = $400 |

The pro-rated rent amount the landlord will charge Jane for the first month is $400.

Prorating is widely used in billing situations, including the following examples:

- Service provider of a monthly subscription prorates the bill for a client who subscribed mid-month and only used the service for a few days rather than the whole month.
- Utility company (e.g., electricity, water, gas, waste, telephone, internet) bills for a prorated amount calculated based on how much of the service the customer used in a period rather than a fixed rate.
- Property management company prorates bills for less than a full-month of rent if a tenant only occupied a property for a part of the regular billing cycle.

Prorated Bill **=**

( Total billing amount **/** Minimum billing unit )

**x** Number of billing units used

Examples of pro rata refunds and cancellations include:

- Prepaid annual subscription (e.g., magazine, gym) that a customer wishes to cancel in the middle of the regular billing cycle (e.g., annual subscription) in exchange for a prorated refund.
- Student withdraws from a course (e.g., university, language school, piano lessons) in the middle of the term and the educational provider decides to refund the tuition payments on a pro rata basis.

Let’s imagine that a student paid $600 for 6 months of dance lessons in advance.

After 1.5 months, the student requests a refund. According to the cancellation policy of the dance studio, the student is entitled to a refund for the cost of the remaining 4 months of classes. Therefore, the student will receive a refund of $400:

*($600 / 6 months) * 4 months = $400 refund*

Prorated Refund **=**

( Total amount** /** Minimum unit )

**x** Number of remaining units

Jane sent a request to cancel an annual subscription to a magazine that she paid $270 for in advance 7 months ago.

What is the prorated amount that the magazine will refund to Jane for the 5 remaining months she still has left on the subscription?

Follow the two steps below to calculate Jane’s pro rata refund:

Step | Explanation | Calculation |
---|---|---|

Step #1 | Calculate the unit cost (here monthly issue of a magazine) by dividing the total cost ($270 yearly subscription) by 12 (because 1 year = 12 months) | $270 / 12 = $22.50 per month |

Step #2 | Multiply the unit cost calculated in Step 1 by 5 (because Jane has 5 months left on the subscription) | $22.50 x 5 = $112.50 |

The pro-rated refund Jane will receive from the magazine is $112.50.

Pro rata calculation is used by companies to assign the appropriate portion of the total dividend amount available to individual shareholders based on their holdings of dividend stock.

As a result, pro-rata dividend payment means that each shareholder receives an equal proportion for each share held.

However, an important point to note here is that dividend payments are not prorated based on how long the investors have owned their shares.

Whoever is a shareholder as of the date of record receives the same dividend amount per share when dividends are being paid out.

For example, if a company that has 1,000 shares outstanding issues a total dividend of $10,000, this results in $10 dividend per share.

Let’s assume that this company has 5 shareholders who hold 550, 225, 150, 50 and 25 shares respectively.

The majority shareholder who holds 550 shares will receive a dividend payment of $5,500, calculated as:

*(550 / 1,000) X $10,000 = $5,500*

The result is equal to multiplying the investor’s shareholding by the dividend per share:

*550 * $10 = $5,500*

The pro rata dividend of the remaining shareholders is $2,250, $1,500, $500 and $250, respectively.

Prorated Dividend (per shareholder)** =**

( Number of shares held by an individual shareholder

**/**

Total number of outstanding shares issued by a company )

**x**

Total amount of a dividend payment issued by a company

Jane owns 15 shares of Company XYZ. The Company has 500 outstanding shares and issued a total dividend of $100,000 this year.

What is the prorated dividend payment that Jane will receive as a shareholder of Company XYZ?

Follow the two steps below to calculate Jane’s pro rata dividend payment:

Step | Explanation | Calculation |
---|---|---|

Step #1 | Divide the number of shares held by Jane by the total number of shares Company XYZ has outstanding. | 15 / 500 = 0.030 |

Step #2 | Multiply the fraction calculated in Step 1 by the total amount of the dividend payment issued by Company XYZ. | 0.030 x $100,000 = $3,000 |

The pro-rated dividend payment Jane will receive from Company XYZ is $3,000.

In insurance, pro rata calculations are used to determine, for example:

- Prorated annual premium amount reduced for a short-term insurance policy that covers a partial term of less than the full 12-month year
- Return premium of a cancelled insurance policy
- Risk based on the time an insurance policy is in effect
- Proportional liability when more than one entity is responsible for a loss, damage or accident
- Claim payout proportionate to the interest in the asset that an insurance policy covers (e.g., condition of average)
- Obligation of an insurer to cover only a portion of a loss if the insured has policies with other insurance providers covering the same risk (e.g., pro rata liability clause).

Let’s take a look at two examples of calculating insurance premiums pro rata:

Jane needs car insurance for 120 days. However, the standard car insurance policy of her chosen provider is based on a 12-month period.

In order to calculate how much to charge Jane for the partial term, her insurer will prorate the annual premium in 2 steps:

- Divide the total premium amount by the total number of days in a standard term.
- Multiply the daily premium by the number of days covered by the partial term policy.

Due to an unexpected turn of events, Jane needs to cancel the car insurance policy after only 30 days. Here is how the insurer will calculate the return premium of the cancelled insurance policy:

- First, divide the number of days remaining on the policy (90) by the number of total days in the policy (120). This is sometimes called a return premium factor.
- Next, multiply the factor (90/120 = 0.75) by the policy premium ($360).

The insurer will issue a refund for $270 as a return premium of Jane’s cancelled insurance policy.

In terms of interest rates, prorating is most frequently used to allocate the appropriate portion of an annual interest rate to a shorter time frame to determine the amount of interest that is due to be earned or paid on a financial product, such as an investment or a loan.

For example, the market price of bonds may include interest that has accumulated since the bond’s last coupon date, because the bond buyer reimburses the share of accrued interest that belongs to the bond seller.

If a financial product earns an annual interest rate, then the pro rata amount earned for a shorter period is calculated by:

- Dividing the total amount of interest by the number of months in a year
- Multiplying the result by the number of months in the shorter time period

For example, the pro-rated amount of interest earned in 2 months on an investment that yields 12% interest each year is 2%, calculated as follows:

*(12% per annum / 12 months) x 2 months = 2%*

For example, an accountant may prorate a materials price variance to the relevant cost categories (e.g., inventory, work-in-progress inventory, finished goods).

In cost accounting, the materials price variance is the difference between the actual and budgeted cost to acquire materials, which is used to identify instances where a business may be overpaying for materials.

Let’s consider the following example:

The cost accounting system of Company XYZ shows the following:

- Inventory – materials cost: $200,000
- Finished goods – materials cost: $300,000
- Materials price variance: $50,000

In Company XYZ, the pro rata share of the materials variance assigned to inventory is $20,000, calculated as:

*($200,000 / $500,000 ) x $50,000 = $20,000*

The remainder of the prorated variance, i.e., $30,000, is allocated to the finished goods, because:

*($300,000 / $500,000 ) x $50,000 = $30,000*

Examples where liability in legal claims may allocated pro rata:

**Tort:**

In tort law, liability for a defective product may be allocated pro rata between manufacturers and other supply chain participants.

**Partnership:**

In partnerships, each of several partners may be liable pro rata according to their individual share in the partnership agreement.

**Insolvency:**

In bankruptcy cases, creditors may agree to accept a pro rata share of what is owed to them, in which case any remaining funds of the insolvent debtor are distributed proportionately among the creditors according to the amount of their individual debts.

**Insurance:**

A pro rata liability clause in an insurance policy may stipulate that an insurer is obliged to cover only a prorated portion of a loss if the insured holds more than one policy with multiple insurance providers to cover the risk in question.

**Real-estate:**

In real estate transactions, certain expenses, such as real estate taxes and homeowners association dues, are prorated between the buyer and seller.

**How Do You Spell “Pro Rata / Prorated” Correctly?**

There are multiple correct and commonly used ways to spell the terms “pro rata” and “prorated”:

Spelling | Term “Pro Rata” | Term “Prorated” |
---|---|---|

Space " " | pro rata | “pro rated” is not commonly used |

Hyphenated "-" | pro-rata | pro-rated |

Neither space nor hyphen | “prorata” is not commonly used | prorated |

Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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