What Is Pro Rata Share & How Is It Used (With Examples)

Author Casaldra Andreassen Read bio
Tags: cre terms pro rata share
Date: August 31, 2021

Whenever we are moving into a new house, especially if that’s happened on any day that’s not the first day of the month – the property owner is most likely to prorate the rent due, all based and depending on the number of days you use the apartment or house.

If a tenant were to move in mid-month, his gross rental lease could be “prorated”, meaning that he would have to pay only a percentage of their total rental fee.

This percentage would be the days he occupied the space, vs the total days in the month.

Managers usually choose to share the cost between the two segments of time, resulting in each incurring the same amount.

Pro Rata Share Definition – What Does it Mean?

Let us explain pro rata meaning, basis and definition a little bit better.

Pro-rata share is an accounting term used to express sharing within equal proportions. The term itself originates from Latin, and it describes proportionate amounts of something that’s being shared, depending on ownership percentages/stakes.

It basically means “in proportion”, assigning or allocating value in balance to something that can accurately and definitively be measured/calculated, and shared.

Pro-rata share is also synonymous with the annual interest rate provoked in a loan, but in this case, the total interest can be broken into monthly or bi-monthly interest over the term of the loan.

Banks for example are fond of breaking down interest into equal fraction amounts, payable over a given period.

Court building

How Does Pro Rata Work?

As we have stated in previous paragraphs, pro-rata literally means dividing something to make up a whole. That doesn’t mean that all parts need to be equal, but it is true that each piece is given value in proportion to something else.

Pro-rata share is particularly useful when the exact value of something can’t be easily or precisely determined, but can easily be assigned a proportion value when compared to something else.

Examples of pro-rata being used include the division of monthly adjusted loan payments. However, the number of monthly payments is allocated between the principal payment and the interest paid for the loan change each month as the loan gets paid off.

Key Takeaways

The pro-rata share system also signifies the ability to prorate, especially useful whenever it’s necessary to allocate or reallocate units of measurement across (even smaller) units or pieces.

The buying and selling of goods or services can be sensitive to time, and the companies responsible for them are the primary users of the pro-rata share system for allocating value.

How Are Pro Rata Shares Calculated?

Pro-rata share calculations are often used to calculate dividend payments for the shareholders in a company. Likewise, pro-rata share is used to determine premium dues in insurance policies covered by a partial term.

For example, assume that some company announces they are paying a $750,000 cash dividend for its shares. If the company owns 250,000 shares in the market, each dividend is prorated to $3.

The pro-rata share amount is determined using a simple formula:

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

Using the information provided with the pro-rata share formula, we get the dividend amount:

750,000 / 250,000 = $3 per share

Modern building bending inwards

Pro-Rata – The Best Prorated Examples

Dividend payments are a classic example of pro-rata share since they are paid – per share. Shareholders receive dividends in direct proportion to the number of current stocks they own.

Pro-Rata in Everyday Life

You will probably encounter pro-rata at some point in your life. The best example is if you’re moving into a new apartment on any day other than the first day of the month. Then your landlord is likely to prorate your rent based on the rest of the month.

By dividing the total monthly rent by the number of days in the month, the landlord can determine the amount of the rent that is proportionate to pay.

For example, let’s say you are moving in (or out) on 15 March and your monthly rent is $700, calculating your pro-rata rent for the month goes like this:

  1. Determine your rent prorated per day.

$700 / 31 (No. of days in March) = $22.58

  1. Calculate the pro-rata rent for the month.

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

Pro-rata share is essentially the proportionate sharing of something, not only useful in the finance world but also in day-to-day life activities.