Proration
Proration is the calculation of a charge for a partial billing period – for example, when a subscription starts, ends, or changes in the middle of a billing cycle.
Billing
Explanation
Typical situations requiring proration:
• a subscription starts or ends mid-period,
• a customer upgrades or downgrades during the period,
• seats, licenses, or capacity are added or removed,
• a price change takes effect within the period.
Proration can be based on days, months, or other units, and companies define rules such as whether credits are issued for downgrades and how rounding is applied.
Why It Matters
Proration determines what the customer is billed. For revenue accounting, the underlying change may be a contract modification under ASC 606 and IFRS 15 and must be classified and accounted for accordingly. Inconsistent proration rules between billing and revenue systems lead to differences between billed amounts, recognized revenue, and contract balances.
Related Terms
Billing Cycle · Recurring Billing · Contract Modification · Credit Memo
Related Articles
• Contract Modifications: Prospective vs. Cumulative Catch-up
• Subscription and Usage-Based Billing: Key Design Decisions
Related Solution:
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