Pro Rata: Definition, Examples, and How to Calculate

The term “pro rata,” a Latin term meaning “per the rate” or “proportionally,” is most commonly used in situations where someone pays or charges a certain amount proportional to their involvement or stake in a given venture or service. This is also sometimes referred to as a prorated amount, and the process of applying a pro rata calculation is referred to as prorating.

For example, if someone buys an insurance policy that’s quoted at a certain price for a full year of coverage, but that person only signs on for half a year’s worth of coverage, they would pay the insurance company on a pro rata basis that would come out to half the value of the full policy. This would be based on the fact that they only enjoyed the coverage for half the number of days intended in the full list price. If the policy costs $40 for the year, the total amount of the pro rata insurance premiums for that buyer would be $20.

In any situation where a pro rata payment comes into play, the calculation of a pro rata payment is essentially the same, even if the specifics of the situation are unique. This simple formula to prorate a full amount boils down to:

(Fractional ownership or fractional entitlement) x Total amount of asset to be distributed = Prorated amount

Pro rata calculations have a number of useful applications, particularly in the business world. Here are a few of the more common ones.

1. 1. Dividend payments: When a corporation pays out cash dividends to shareholders, it’s done on a pro rata share basis. In other words, the amount of the total dividend payment a shareholder receives depends on the number of shares they have relative to the whole. Say the total number of shares sold by a given company is 50, and a shareholder owns 25 shares. If the company pays out $500 in total dividend payments, that shareholder would earn half of the total dividend amount: (25 shares owned / 50 shares total) x $500 = $250.
2. 2. Part-time work: When an employer hires part-time employees, they sometimes calculate the employees’ pro rata salary based on the number of days or number of hours they work compared to a full-time employee’s annual salary or hourly rate. Let’s say a part-time employee works twenty hours a week compared to a full-time employee’s forty-hour week (and, of course, assume the company pays both employees the same rate). If the full-timer gets paid $60,000 for the year, assuming a pro rata basis, the amount due to the part-timer would be (20 hours part-time/40 full-time hours) x $60,000 full yearly salary, or $30,000 for the year.
3. 3. Short-term interest: Say you have an investment that accrues interest on a yearly basis. You can use a pro rata calculation to determine how much interest you would accrue in a month. Assume that this given investment pays twenty-four percent for the year. (That’s a hefty return, but this is just an example.) To find out how much you would earn in just one month, you could divide that twenty-four percent by the total number of months in the year (twelve) to determine the fractional interest, then multiply by the number of months you’re trying to find the interest rate for: (24% / 12 months) x 1 month = 2%.

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