Prorate

To prorate, in general, means to allocate things in proportion or proportionally.

In finance, this can be applied to various scenarios. Let us say that a business sells magazines on a subscription basis. If we apply the term prorate to this business, a subscription may be prorated based on terms other than the standard period. For example, the standard subscription period is a minimum of one year. If a customer wishes to purchase a subscription for only 6 months, then the price can be prorated to half (six months is half of a year).

The same principle applies to business offering other products or services dependent on regular payments. Service companies or utilities may have to prorate their charging, for one. If a client makes use of their service for a fraction of time (as compared to their normal period of time), then prorating is applied. Let us say that a cable TV company normally charges fees quarterly. If a customer only uses five months out of two quarters (six months), then he would only have to pay for that period of time.

In some cases, companies also have to prorate in terms of salary or bonus packages. This is again dependent on the company’s conventions. Let us say a company offers a certain amount as an incentive for every year of service rendered. If an employee has rendered several years plus a few months’ worth of service, then his incentive may be prorated to match the exact amount.

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