When running your business accounts for the first time it can be quite confusing when you see all of these technical accounting terms flying around and not knowing what they all mean. A very common phrase that pops up is ‘Pro Rata’ and I’ve had many people asking me about its definition but it’s actually a really simple term to explain so I thought I’d write a quick blog about what Pro Rata means and how it applies in the world of accounting.
What Pro Rata Means
In its purest form, ‘Pro Rata’ is an old Latin term meaning ‘in proportion’. In the world of business and accounting we simply use it to define how much a proportion of something is worth – basically working out the ‘share’ or ‘percentage’ of anything within your business.
So let’s take an example:
We have a Business Partnership consisting of 2 equal owners – both owners buy an asset for the business worth £100. The ‘pro rata’ of that asset for each partner is half (or 50%) since there are 2 owners of the asset, therefore the pro rata of that asset for each partner is £50 (£100 divided by 2).
And that’s it, hat’s all it means! So when you actually see it in action you’ll quickly realise you knew exactly what pro rata was, you just didn’t realise it meant ‘that’!