Definition: Pro rata share is a method that assigns a proportionate amount of income or losses to shareholders or members of a company based on their ownership percentages.
What is the definition of pro rata share? Originating from the Latin term in proportion, pro rata allocates equal fractions of an amount. The method takes into account a smaller percentage of the entire amount and allocates a relevant cost to that percentage. For instance, when costs relate to two different business segments, the business owner needs to allocate a percentage of the entire cost to one segment and a percentage of the entire cost to the other.
Another common example is the annual interest rate that can be broken into monthly or bi-monthly interest rate over the term of a loan. So, banks prorate the interest payments into equal fractional proportions of the entire amount. Prorating is also applied to bonds, dividend payments, and annual insurance premiums.
Let’s look at an example.
Example
Company XYZ is a leading retailer with stores all over the nation. The company sells sports equipment and outfit and realizes a profit of $500,000 annually. However, as the administrative expenses are quite high, $350,000, the company’s accountant wants to allocate this amount between sales and human resources departments.
First, he collects information regarding the hours worked from both departments. He finds that the human resources department has a total of 1,500 hours, whereas the sales department has a total of 1,800 hours. Hence, both departments worked for 3,300 hours.
Then, he calculates the pro rata percentages as follows:
Human Resources: 1,500 / 3,300 = 0.45
Sales: 1,800 / 3,300 = 0.55
Then, he allocates the administrative expenses of $350,000 between human resources and sales as follows:
Human Resources: $350,000 x 0.45 = $159,091
Sales: $350,000 x 0.55 = $190,909
So, $159,091 of the total administrative expenses go towards human resources and $190,909 go towards sales.
Summary Definition
Define Pro Rata Per Share: Pro rate share means a earnings and losses are split amongst shareholders based on their ownership percentages.
