What is Pro-rata?

To prorate means to divide an amount proportionally. Therefore, pro rata is the proportional distribution of a quantity or cost among different parts or persons.

The proration of allowances

This is a concept that is commonly used in the workplace. The “proration of allowances”means that the amount corresponding to extra payments of the gross annual salary is not paid to the worker in two extra payments (normally paid in June/July and December), but instead the amount is divided (pro-rated) over 12 months and paid in equal parts in the monthly salary. In other words, if a worker has "pro-rata extra payments" they will get 12 payments a year, not 14. The amount is the same, what changes is the way it is received.

Pro-rata in other contexts

Proration is also a concept used in the area of accounting, when reference is made to certain expenditure or costs which are allocated proportionally. For example, when indirect production costs are shared (such as electricity, telephone, internet, water, cleaning, rent for the premises...) among the different departments of a company. This is what is called primary apportionment in accounting.

VAT apportionment is also applied when an entrepreneur is not obliged to charge this tax on all his or her invoices (because there are activities that are exempt) but does charge it on some of them. In this case, the proration consists of deducting the VAT only for the activities for which the effective right to deduct it applies. Here the proration is calculated as a percentage, which is obtained by dividing the amount of the invoices for goods or services to which VAT has been applied by the total number of transactions carried out during the period. The result is multiplied by 100 to obtain the final pro-rata percentage to be applied to the costs incurred (to the VAT that has been paid).

Another area where it is possible to prorate is in an IPO, when the demand (for shares) is greater than the supply, or in a takeover bid, when the number of shares that the shareholders are willing to sell to the bidder is more than the bidder wanted to buy. In this case, the company presenting the bid is obliged to make an apportionment, i.e. it must make its purchases proportionally among the shareholders who accepted its bid.

Another case in which proration is used is that of neighbourhood communities. Each owner has a percentage share in the community, which is determined by the surface area of their home or premises as a proportion of the total surface area of the building. The general expenses of the property, and any excess or income of the community, will be prorated among all the owners according to their percentage share.

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