If you ever want to start a service contract or subscription after the calendar year has begun, you might be asked to pay for service through the end of the year, rather than for 365 days. In order for the company to do this, they will have to prorate your contract.
You might run into prorated amounts for other reasons, as well, or might want to make an offer of a prorated payment to a business. Knowing the "prorated bill" meaning or how to calculate prorated offers or other amounts will help you find out in advance exactly what you'll be paying.
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Consider also: How to Calculate Prorated Rent
Why Do Companies Prorate?
Some businesses want to make their accounting as easy as possible. One way to do that is to make all contracts renew at the same time. For example, if you join a trade association, a gym or a tennis league, you might pay your annual dues starting on the date you pay, and that will be your renewal date each year from then on.
In other cases, you might be asked to pay your dues only through December 31 of the current year. This means you won't pay a full year's dues – you'll only pay a part of the year's dues, or a prorated amount. Many subscriptions are also often prorated, explains GoCardless.
Another situation arises when you pay for a full contract in advance to receive a discount. If you want to cancel your contract or subscription early, you'll have to pay the regular rate, and the company will go back, look at how much service you received, and add back your discount to what you owed, prorating your account.
Consider also: What Does Prorated Mean?
It’s a Partial Payment or Refund
"Prorated amount" meaning can refer to money you have to pay or are getting back. When you are starting a membership or subscription late (because all contracts, dues terms or subscriptions with this example business end on December 31), you won't be charged for the full year. The company will only pay you for what you use (of your subscription).
If your contract lets you cancel early and you've pre-paid, you'll get money back. What you'll get is the part of your payment that you haven't yet used. How does the company determine that amount? They prorate your account using a simple formula.
Because some transactions are so expensive, companies prorate down to the specific day, not just the month. This is often the case when you buy or sell a house and are dealing with things like insurance payments, points out Clever.
Consider also: What Does Prorate Mean in Real Estate Terms?
Calculating a Prorated Amount
The easiest way to calculate prorated amounts is to determine how much time your contract covers, how much money each time unit (such as a month) costs and then do some simple multiplication. Let's say you want to join your profession's trade association. Member dues are $180 per year. That comes to $15 per month. The association bills all members on January 1 for the next year's membership.
You have applied for membership and have been accepted, but it's early October. That means you have three months' of membership left for the year. You'll pay $15 x 3 for a $45 prorated membership this year. On January 31, you'll be billed $180 for next year's membership.
In some cases, the math doesn't work out so neatly. Let's say you pay a restaurant $200 for a 12-month VIP customer program. You get a new job and have to move after seven months. The restaurant agrees to refund your unused months, or prorate your membership. So, $200 / 12 = $16.67. Multiply $16.67 by 5 to get a refund of $83.33.
You might not receive that amount if you arranged for a discount in exchange for long-term contract commitment. Let's say the restaurant normally charges $20 per month ($240 per year) for its VIP customer program. If you cancel five months early after paying $200, the restaurant will charge you the regular rate of $20 x 7 months = $140. You will then only get a refund of $60.