What does Prorated mean?
In accounting and finance, prorated means adjusted for a specific time period. For example, if an employee is due to a salary of $80,000 per year, and they join the company on July 1, their prorated salary for that year would be $40,000.
How to prorate a number
Let’s look at an example of how to prorate a number using some simple assumptions. The case study here is that Susan is supposed to earn $30 per hour, paid to the nearest minute. She works 47 minutes. What is her prorated compensation?
To calculate the answer, follow the steps below:
- Take her hourly rate of $30 and divide it by 60 to find her rate per minute.
- Multiple her rate per minute by 47 to arrive at the answer:
= ($30 / 60) x 47 = $23.50
Download CFI’s free Prorate Calculator.
When are prorated numbers used?
There are many examples of times when a prorated number is required. Let’s review a list of the most common situations.
- When an employee worked for less than a year
- When an employee worked for less than a month
- When a contractor worked for less than an hour
- When a monthly subscription began mid-month
- When a company bills for its services based on usage (utility bills)
- When a tenant moves into a rental space mid-month
While there are lots of examples of when to prorate numbers, there are also many examples where numbers are not prorated. One of the most important examples is dividends. Shareholders are paid a dividend based on the date of record they became shareholders, and everyone receives the same dividend amount per share when they are paid.
Using prorated in a conversation
Here is an example of a conversation between an Analyst (A) and a Vice President (VP), talking about numbers in a financial model.
VP: Did you update the model to include the new office lease figures?
A: Yes, I increased the office rent number to reflect the higher rate starting in July.
VP: Did you prorate it?
A: Yes, I prorated it based on a move-in date of July 23.
VP: Okay great, thanks!
Thank you for reading CFI’s guide to prorated numbers.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: