Simply put, a prorated amount represents a piece of a whole, such as a partial refund of one month's paid rent. Generally, to calculate the prorated amount for a specific transaction, divide or distribute the money or assets based on the proportion specified in a contract, the percentage of use, or another agreed-upon variable. Prorated expenses are common in both business transactions and personal finance. You might experience some type of proration with real estate transactions, business expense calculations or service contracts.
Real Estate Sales
When buying or selling real estate, property taxes may be prorated between the buyer and seller, since the tax bill typically is paid annually or semi-annually. For example, if a sale takes place at the end of March, property taxes are prorated based on the tax rates from the previous year. In this example, the seller would pay one-fourth of the property tax bill, representing January, February and March. The buyer would pay the remaining three-fourths of the bill for April through December.
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The insurance industry uses prorated amounts when figuring how much of a prepaid premium to return when a policy is cancelled. Suppose you switch auto insurance companies three months after paying in advance for six months of coverage from your old employer. That means you still will have paid for three months of coverage on the previous policy at the time of the switch. Your former insurance provider will prorate the premium and return the money to you. For example, if six months of coverage cost $900 then the monthly cost would be $150. In this situation, the insurance provider would prorate the amount and return $450 to you for the three months of unused coverage.
Business owners may need to calculate pro rata amounts in figuring tax deductions. If the owner travels for business and spends part of the time engaging in leisure activities, the expenses need to be separated. Perhaps the business owner spends three days in a hotel for business, and then extends his stay an additional day as a vacation. The hotel bill would be prorated, and three-fourths claimed as business expenses when filing income tax returns.
Businesses that use service contracts may need to adjust invoices based on prorated amounts. If a customer pays $90 for a monthly service, then cancels on the 20th day of the month, the business may prorate the amount of unused service and adjust the invoice accordingly. For a 30-day month, the daily cost would be $3. Calculating the amount for the 10 days not used would be $3 x 10 or $30.
In Rental Agreements
Rental agreements that require rent to be paid on the first day of each month may need to be prorated when a tenant moves in or out in the middle of the month. In this situation, the monthly rental amount is divided by 30 to find cost per day. The property manager then charges or refunds the prorated amount depending on the situation.