Prorations

Prorations are the allocation of an amount of money between two or more parties or time periods according to a proportional share, typically based on the amount of time or use involved. They are commonly used to settle charges that cross a boundary, such as a lease start or end date, a closing date in real estate, or a period of service.

Common contexts

- Leases and rentals: prorated rent arises when a tenant occupies a property for part of a billing period. The daily rate is often calculated as monthly rent divided by the number of days in the month, multiplied by the number of days the tenant occupies the property.

- Real estate settlements: at closing, costs such as property taxes, homeowner association dues, and sometimes utilities or insurance are prorated between the seller and the buyer based on the portion of the year or billing period each party owns or is responsible.

- Utilities and services: charges may be prorated when service begins mid-cycle or when use spans multiple billing periods.

- Business and accounting: expenses or revenues can be prorated for partial periods, for example to align with fiscal quarters or project timelines.

Methods

- Time-based proration: proportional to the number of days or months of use.

- Accrual-based: recognizes a liability or asset for the portion not yet billed or paid.

- Prepaid vs. accrued: a prepaid amount is allocated as it is earned or used; an accrual recognizes what is owed at period end.

Formula (illustrative): prorated amount = (days of use / total days in period) × total amount. Examples must account for variations in month length and leap years. Proration clauses in contracts specify how these calculations are performed.