Pro Rata ShareDefined with Examples & More

Written By:
Lisa Borga

Pro-rata is a Latin term that describes a method of proportionally allocating something.

This is often used in business finance to describe allocating a company’s income or loss to its owners.

In this use, the proportional allocation is based on the percentage of ownership each member or shareholder holds relative to the whole.

What Does Pro Rata Share Mean?

The term pro rata originally comes from a Latin term literally meaning in proportion.

In business, using pro rata means that an amount is to be fairly distributed in proportion to the whole.

When using this method, a smaller percentage of the total amount is considered, and an appropriate amount is allocated to each percentage.

How Does Pro Rata Work?

Pro rata generally means that a given party will receive their fair share of something in proportion to the whole.

This concept can be used in a wide variety of ways, from determining insurance premiums to assigning annual interest rates to a shorter period.

As a result of the wide range of potential uses, the precise calculations that will be used vary considerably.

For example, if a business needs to allocate administrative costs to two business segments, it needs to assign a percentage of the entire administrative cost to each segment.

This will fairly allocate the cost between the two sectors.

For another example, interest rates can be divided over the course of a loan into monthly or bi-monthly interest rates.

In this case, banks prorate these interest payments by dividing the total amount of interest for the year by the number of months or bi-monthly periods and multiply this number by the desired number of months, thus giving equal interest payments throughout the period involved.

Pro Rata and Shareholder Dividends

Another very common use of pro rata is how companies issue dividends to shareholders.

When this occurs, every shareholder of a company will receive payments based on their holdings.

Let’s say that a company has 10,000 shares outstanding, and it chooses to issue a dividend of $3 per share.

In this case, the total sum of the dividends paid will be $30,000.

This number represents the total amount that the company will pay irrespective of the number of shareholders this is divided among.

Now each shareholder will receive a share of the $30,000 based on the number of shares that they hold.

The amount that a particular shareholder would receive can be found by taking the number of shares that a person holds and then dividing it by the total number of shares.

The resulting number can then be multiplied by the total sum of the dividend payments, which in this case is $30,000, to find what dividend payment a particular shareholder will receive.

If a shareholder in our example were to own 3,000 shares of stock, they would earn $9,000.

This would be found by dividing their 3,000 shares by the total number of shares which is 10,000.

This would be 30% of the total shares, which is then multiplied by the $30,000 total of dividends.

This results in a portion for this shareholder of $9,000.

Pro Rata Share Definition

Pro rata share means that stockholders equally share any losses or income of the company depending on the number of shares the stockholder owns.

Example

The Budget Company has a chain of discount clothing stores located nationwide.

The company sells clothing and accessories and has annual profits of $1 million.

But, the company’s accountants have noticed that the administrative costs have been particularly high recently at $500,000.

So, they want to allocate the costs between their sales and customer service departments.

To do this, the accountants find out the hours that the employees from both departments worked.

The sales department worked 2,500 hours, and the customer service department worked 2,000 hours. So, the total hours worked were 4,500 hours.

The pro rata percentages would be computed as shown below.

Sales Department: 2,500/4,500 = 55.6%

Customer Service Department: 2,000/4,500 = 44.4%

After this, the accountant would allocate the administrative expenses between the sales and administrative departments.

Sales Department: $500,000 * 55.6% = $278,000

Customer Service Department: $500,000 * 44.4% = $222,000

This means that $278,000 of the administrative costs are allocated to the sales department, and $222,000 of the administrative costs are allocated to the customer service department.

Key Highlights

• Assigning something pro rata generally indicates that everyone will receive a fair allotment.
• Pro rata indicates that something is proportional such as costs of benefits that may rise proportionally with an employee’s pay.
• Pro rata distribution is common in many aspects of the business, including billing customers for services, distributing income and losses in a partnership, or paying shareholders dividends.