Pro rata is a Latin term that means "in proportion" or "proportionally". It is used to describe a proportionate allocation of something, where whatever is being allocated will be distributed in equal portions. Pro rata can be communicated as a percentage or as a quantity.
Pro rata calculations are often used in business finance, insurance, salaries, hourly wages, dividend payments, interest rates, and loan payments. For example, in insurance, pro rata is used to determine the amount of premium due for a policy that only covers a partial term. In salaries, pro rata is used to calculate the salary of a part-time employee based on the number of hours worked compared to a full-time employee. In dividend payments, shareholders receive dividends in direct proportion to the number of common stock they own.
The pro rata system or the ability to prorate is especially useful whenever it’s necessary to allocate or reallocate single units of measurement across different time periods or different groups of people. Pro rata works because the proportion of one good is imposed on another. Instead of getting all of the items, someone can get a pro rata share, a proportional offering based on how much they are entitled to.
