What Is Pro-rata share?
Definition: Pro-rata, share is an accounting term used to denote sharing in equal proportions. Originating from a Latin term, the methodology is used to assign a proportionate amount on whatever is being shared, depending on ownership percentages or stakes.
Likewise, the Pro-rata share can denote the equal sharing of losses and income in a company among shareholders. In this case, an investor would generate an income depending on the amount of shares he or she owns in the company. Similarly, the same shareholder would incur a loss proportionate to the amount of stakes they own in the company.
In addition, when costs incurred in business relate to two different segments, managers might opt to share the cost between the two segments resulting in each incurring the same amount. The sharing, in this case, takes into account a smaller percentage fraction of whatever is being shared.
Whenever you are moving into a new house on any other day other than the first day of the month, then the property owner is likely to pro-rate the rent due, depending on the amount of days you will be in the house.
Pro-rata share is also synonymous with the annual interest rate incurred in a loan. In this case, the total interest might be broken into monthly as well as bi-monthly interest over the term of the loan. Banks are fond of breaking down interest into equal fraction amounts payable over a given period.
Pro-rata share calculations are often used to calculate dividend payments for the shareholders in a company. Likewise, they are used to determine premium dues in insurance policies covered by a partial term.
Pro-Rata in Dividend Payment
Pro-rata share is commonly used in the calculation of dividend payments, to shareholders in a company. In this case, each shareholder gets to walk away with dividend payments equivalent to their amount of holdings in the company
Consider company ABC that has 1000 shares outstanding and intends to issue $2 per share in dividends. In this case, the total dividends payable would amount to $2,000. In this case, $2,000 would be shared based on the amount of shares that each shareholder owns in the company.
Now consider shareholder X Y and Z, each owning 500 shares, 200 shares, and 300 shares, respectively. In this case, the amount of money earned from the total dividend payment pool would be
Shareholder X = X 2000= $1000
Shareholder Y = X 2000= $400
Shareholder Z= X 2000= $600
Pro-Rata in Insurance Payments
Pro-rata, share methodology is also used in the determination of the amount due when it comes to partial insurance policy terms. Most insurance companies offer policies that cover a full 12 months. However, given that there are people who demand short-term coverage, it often calls the insurance companies to reduce the amount of premiums that the people would have to pay. Thus, pro-rata share can be used to calculate the amount of premiums that the insured would have to pay in the short term.
For instance, consider a full-year health insurance policy that comes with a premium of $1500. If a person comes and demands to be covered for 100 days, the insurance company would have to reduce premiums payable accordingly.
In this case, the premium payable on the pro-rata share basis would be X 100= $411
Thus, the insured would have to pay $411 for coverage over 100 days rather than paying the full amount, which in this case is $1,500.
Summary
Pro-rata, share, which is essentially the proportionate sharing of something, is not only useful in the finance world but also in day-to-day life activities.
The sharing methodology is especially useful when there is a need to reallocate single units across small units or pieces. In this case, sharing is made possible based on ownership percentages.