{"id":21552,"date":"2024-12-04T06:57:19","date_gmt":"2024-12-04T06:57:19","guid":{"rendered":"https:\/\/www.mooninvoice.com\/blog\/?p=21552"},"modified":"2024-12-04T06:57:19","modified_gmt":"2024-12-04T06:57:19","slug":"prorated-billing","status":"publish","type":"post","link":"https:\/\/beta.mooninvoice.com\/blog\/prorated-billing\/","title":{"rendered":"What Do You Mean By Prorated Billing &#038; How It Works?"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\n    {\n      \"@context\": \"https:\/\/schema.org\",\n      \"@type\": \"FAQPage\",\n      \"mainEntity\": [{\n        \"@type\": \"Question\",\n        \"name\": \"How to prorate a bill?\",\n        \"acceptedAnswer\": {\n          \"@type\": \"Answer\",\n          \"text\": \"Simply determine the outstanding amount based on the actual usage and then divide it by the number of days (as per your billing cycle). Now multiply the resulting amount by the days the service was utilized to ensure the prorated utilities match the partial usage. By doing so, you can create a prorated bill.\"\n        }\n      }, {\n        \"@type\": \"Question\",\n        \"name\": \"What is an example of prorated?\",\n        \"acceptedAnswer\": {\n          \"@type\": \"Answer\",\n          \"text\": \"For example, if you are running a video streaming service at a cost of $50 for a 30-day billing cycle, the daily rate would be approximately $1.67. If a user decides to cancel their active plan just after 12 days, the outstanding amount would be $20.04 (12 \u00d7 $1.67). The remaining balance of $29.96 should be refunded because it is the unused portion of the service.\"\n        }\n      }, {\n        \"@type\": \"Question\",\n        \"name\": \"What causes prorated charges on a bill?\",\n        \"acceptedAnswer\": {\n          \"@type\": \"Answer\",\n          \"text\": \"Change in the active plan or upgrade in service can cause prorated charges. If your customer upgrades to a higher plan or cancels the service anytime between the billing cycle, it triggers prorated billing rather than the standard billing process. The prorated charges are applied to make sure the customer pays only for the days they use the service and not for the entire billing period.\"\n        }\n      }, {\n        \"@type\": \"Question\",\n        \"name\": \"Are there tools to help implement Prorated Billing?\",\n        \"acceptedAnswer\": {\n          \"@type\": \"Answer\",\n          \"text\": \"Advanced invoicing software like Moon Invoice is the only tool you need to adopt a prorated billing process. The automation software ensures you make accurate and professional bills with readymade templates and drive customer satisfaction. Moon Invoice helps you manage prorated bills in the cloud, leaving no chance of misplacement.\"\n        }\n      }, {\n        \"@type\": \"Question\",\n        \"name\": \"How does ASC 606 relate to Prorated Billing?\",\n        \"acceptedAnswer\": {\n          \"@type\": \"Answer\",\n          \"text\": \"According to GAAP, ASC 606 highlights the revenue recognition whenever the company delivers the service. It says companies must calculate revenue based on how much a portion of the service is provided and not by the number of days. Therefore, every company following prorated billing practices must comply with ASC 606 guidelines.\"\n        }\n      }, {\n        \"@type\": \"Question\",\n        \"name\": \"How do you prorate hourly pay?\",\n        \"acceptedAnswer\": {\n          \"@type\": \"Answer\",\n          \"text\": \"First, determine the pay based on the actual hours your employee worked. You need to find the employee s hourly rate and then, multiply this rate by the number of hours he or she worked. For example, if an employee earns $20 per hour and has completed only 15 hours instead of the usual 42 hours in a week, their prorated pay would be $20 \u00d7 15 = $300. This is how you can accurately compensate an employee for the time they have worked.\"\n        }\n      }]\n    }\n    <\/script><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\/\",\n  \"@type\": \"BlogPosting\",\n  \"mainEntityOfPage\": {\n    \"@type\": \"WebPage\",\n    \"@id\": \"https:\/\/www.mooninvoice.com\/blog\/prorated-billing\/\"\n  },\n  \"headline\": \"What Do You Mean By Prorated Billing & How It Works?\",\n  \"description\": \"Understand prorated billing: its purpose, how it works, and its application in various industries. Learn how to calculate prorated charges and their benefits.\",\n  \"image\": {\n    \"@type\": \"ImageObject\",\n    \"url\": \"https:\/\/www.mooninvoice.com\/blog\/wp-content\/uploads\/2024\/12\/What-Do-You-Mean-By-Prorated-Billing-How-It-Works.jpg\",\n    \"width\": \"1200\",\n    \"height\": \"700\"\n  },\n  \"author\": {\n    \"@type\": \"Person\",\n    \"name\": \"Jayanti Katariya\"\n  },\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"Moon Invoice\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/cdn.mooninvoice.com\/image\/images\/logo.svg\",\n      \"width\": \"254\",\n      \"height\": \"47\"\n    }\n  },\n  \"datePublished\": \"2024-12-04\",\n  \"dateModified\": \"2024-12-04\"\n}\n<\/script><\/p>\n<h2>What Is Prorated Billing?<\/h2>\n<p>Prorated billing is a billing method that adjusts the price in order to match what actually has been used. As its name suggests, it allows businesses to prorate a bill so that customers can pay for services they have used and not for the entire billing period.<\/p>\n<p>Implementing prorated billing means the amount to be paid by customers is only for what services they have used, it can\u2019t be more or less. Although prorated billing brings somewhat more work for businesses, it is still worthwhile because your customers will be more than satisfied, ultimately improving business credibility.<\/p>\n<h2>Who Needs Prorated Billing?<\/h2>\n<p>Any businesses that offer subscription-based pricing for their products need prorated billing, regardless of business size and structure. Even if your business is privately held or public, you need a prorated billing method to manage prorated credit to make sure clients only pay for what they have used without impacting your business revenue.<\/p>\n<p>Subscription-based companies are required to conduct fair <a href=\"https:\/\/www.mooninvoice.com\/blog\/financial-reporting\/\">financial reporting practices<\/a> in order to stay compliant with ASC 606 (A part of GAAP). That\u2019s where prorated billing comes in. It ensures you comply with this accounting principle by charging fairly based on the actual service usage.<\/p>\n<h2>When Should Prorated Billing Be Used?<\/h2>\n<p>Prorated billing can be implemented if any of your customers want to switch to higher plans in the ongoing <a href=\"https:\/\/www.mooninvoice.com\/blog\/what-is-a-billing-cycle\/\">billing cycle<\/a>. So, if the customer wishes to upgrade or downgrade their active subscription plan, you need to issue a prorated invoice, adjusting the cost as per actual usage. So, any users willing to change their active plan amid the ongoing billing cycle can lead to prorated charges, prompting companies to use prorated billing methods.<\/p>\n<p>For example, let\u2019s say you are running a SaaS company, offering subscription-based pricing for your live streaming services. One of your subscribed users asks you to cancel their active plan in the middle of the current billing cycle. At this point, you need to use prorated billing to adjust the due amount as per usage. In this scenario, you need to prioritize prorated billing over the standard billing process, which often overcharges users.<\/p>\n<h2>How Prorated Billing Works?<\/h2>\n<p>The prorated billing process works on several factors such as the number of days, the cost of each plan, and your billing cycle. So, you need to check the date when the customer switched to the other plan and the previously active plan. Then, you can determine the days left in a particular month, including new applicable rates.<\/p>\n<p>SaaS companies usually have a 30-day billing cycle, in which you can include the number of days the customer used the old plan and the number of days the customer used the new plan. By doing so, you can find prorated charges incurred during a billing cycle. This is how prorated billing demands payment only for the services the customer used, not more or less than that.<\/p>\n<h2>How to Calculate Prorated Charges<\/h2>\n<p>Let us take an example to help you understand prorated charges calculations.<\/p>\n<p>Imagine you own a subscription-based company with multiple plans for users to access live-streaming music. A user currently active on the basic plan, priced at $25\/month, decides to upgrade to the higher plan, priced at $100\/month.<\/p>\n<p>The billing cycle starts on the 7th of each month, but the customer asked to change the plan on the 20th of Oct. So, now you need to account for 13 days of the base plan (7th Oct to 19th Oct) and 18 days of the higher plan (20th Oct to 6th Nov). Below is the detailed calculation.<\/p>\n<p>$25 \u00f7 31 days = $0.81\/day<br \/>\n$100 \u00f7 31 days = $3.23\/day<\/p>\n<p>For the basic plan: $0.81 \u00d7 13 = $10.53<br \/>\nFor the higher plan: $3.23 \u00d7 18 = $58.14<\/p>\n<p>As a result, prorated charges would be $10.53 + $58.14 = $68.67.<\/p>\n<h2>Importance of Prorated Billing<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-21555\" src=\"https:\/\/www.mooninvoice.com\/blog\/wp-content\/uploads\/2024\/12\/Importance-of-Prorated-Billing.jpg\" alt=\"Importance of Prorated Billing\" width=\"1200\" height=\"700\" \/><\/p>\n<p>Here are some of the benefits companies can expect by implementing a prorated billing process.<\/p>\n<h3>1. Easy Upselling<\/h3>\n<p>Companies adopting a prorated billing process will find it easier to inspire customers to upgrade their subscription plans, ultimately driving more sales and revenue. Your active users will happily switch to higher plans knowing they don\u2019t need to pay extra for unused services.<\/p>\n<h3>2. Flexibility<\/h3>\n<p>With a prorated billing process, your users get unmatched flexibility to change their active plans. They can downgrade or upgrade their plan as per their needs in the ongoing billing cycle. Prorated billing will ensure they only pay for what has been actually used.<\/p>\n<h3>3. Accurate Billing<\/h3>\n<p>Companies using a prorated billing process to manage users\u2019 outstanding amounts can make accurate bills. They can only charge for the service that has been used by the user, not more or less than that. Companies can <a href=\"https:\/\/www.mooninvoice.com\/invoice-generator\" target=\"_blank\" rel=\"noopener\">generate highly accurate bills<\/a> even if the user has changed the plan.<\/p>\n<h3>4. Delights Customers<\/h3>\n<p>Prorated billing only takes money for actual service usage and not for unused service, making customers satisfied with incurred costs. Even if someone has canceled their plan in between the billing cycle, companies can not charge for the remaining days. This way, it enhances customer satisfaction.<\/p>\n<h2>Conclusion<\/h2>\n<p>Prorated billing ensures accurate <a href=\"https:\/\/www.mooninvoice.com\/blog\/collect-payments\/\" target=\"_blank\" rel=\"noopener\">payment collection<\/a> from customers, regardless of their current plan&#8217;s validity. The process is widely adopted by subscription-based companies to enhance customer satisfaction and maintain steady cash flow. If not manually, you can accelerate prorated billing using automation software like Moon Invoice.<\/p>\n<p>The sophisticated <a href=\"https:\/\/www.mooninvoice.com\/online-invoicing-software\" target=\"_blank\" rel=\"noopener\">invoicing software<\/a> plays a vital role in creating a professional and accurate invoice, which neither needs frequent revision nor manual calculation. Try generating a prorated bill using Moon Invoice for free.<\/p>\n<h2>FAQs<\/h2>\n<div id=\"1-link-21552\" class=\"sh-link 1-link sh-hide\"><h3 onclick=\"showhide_toggle('1', 21552, 'How to prorate a bill?', 'How to prorate a bill?'); return false;\" aria-expanded=\"false\"><span id=\"1-toggle-21552\" class=\"sh-toggle\" data-more=\"How to prorate a bill?\" data-less=\"How to prorate a bill?\">How to prorate a bill?<\/span><\/h3><\/div><div id=\"1-content-21552\" class=\"sh-content 1-content sh-hide\" style=\"display: none;\"><\/p>\n<p>Simply determine the outstanding amount based on the actual usage and then divide it by the number of days (as per your billing cycle). Now multiply the resulting amount by the days the service was utilized to ensure the prorated utilities match the partial usage. By doing so, you can create a prorated bill.<\/p>\n<p><\/div>\n<div id=\"2-link-21552\" class=\"sh-link 2-link sh-hide\"><h3 onclick=\"showhide_toggle('2', 21552, 'What is an example of prorated?', 'What is an example of prorated?'); return false;\" aria-expanded=\"false\"><span id=\"2-toggle-21552\" class=\"sh-toggle\" data-more=\"What is an example of prorated?\" data-less=\"What is an example of prorated?\">What is an example of prorated?<\/span><\/h3><\/div><div id=\"2-content-21552\" class=\"sh-content 2-content sh-hide\" style=\"display: none;\"><\/p>\n<p>For example, if you are running a video streaming service at a cost of $50 for a 30-day billing cycle, the daily rate would be approximately $1.67. If a user decides to cancel their active plan just after 12 days, the outstanding amount would be $20.04 (12 \u00d7 $1.67). The remaining balance of $29.96 should be refunded because it is the unused portion of the service.<\/p>\n<p><\/div>\n<div id=\"3-link-21552\" class=\"sh-link 3-link sh-hide\"><h3 onclick=\"showhide_toggle('3', 21552, 'What causes prorated charges on a bill?', 'What causes prorated charges on a bill?'); return false;\" aria-expanded=\"false\"><span id=\"3-toggle-21552\" class=\"sh-toggle\" data-more=\"What causes prorated charges on a bill?\" data-less=\"What causes prorated charges on a bill?\">What causes prorated charges on a bill?<\/span><\/h3><\/div><div id=\"3-content-21552\" class=\"sh-content 3-content sh-hide\" style=\"display: none;\"><\/p>\n<p>Change in the active plan or upgrade in service can cause prorated charges. If your customer upgrades to a higher plan or cancels the service anytime between the billing cycle, it triggers prorated billing rather than the standard billing process. The prorated charges are applied to make sure the customer pays only for the days they use the service and not for the entire billing period.<\/p>\n<p><\/div>\n<div id=\"4-link-21552\" class=\"sh-link 4-link sh-hide\"><h3 onclick=\"showhide_toggle('4', 21552, 'Are there tools to help implement Prorated Billing?', 'Are there tools to help implement Prorated Billing?'); return false;\" aria-expanded=\"false\"><span id=\"4-toggle-21552\" class=\"sh-toggle\" data-more=\"Are there tools to help implement Prorated Billing?\" data-less=\"Are there tools to help implement Prorated Billing?\">Are there tools to help implement Prorated Billing?<\/span><\/h3><\/div><div id=\"4-content-21552\" class=\"sh-content 4-content sh-hide\" style=\"display: none;\"><\/p>\n<p>Advanced invoicing software like Moon Invoice is the only tool you need to adopt a prorated billing process. The automation software ensures you make accurate and professional bills with readymade templates and drive customer satisfaction. Moon Invoice helps you manage prorated bills in the cloud, leaving no chance of misplacement.<\/p>\n<p><\/div>\n<div id=\"5-link-21552\" class=\"sh-link 5-link sh-hide\"><h3 onclick=\"showhide_toggle('5', 21552, 'How does ASC 606 relate to Prorated Billing?', 'How does ASC 606 relate to Prorated Billing?'); return false;\" aria-expanded=\"false\"><span id=\"5-toggle-21552\" class=\"sh-toggle\" data-more=\"How does ASC 606 relate to Prorated Billing?\" data-less=\"How does ASC 606 relate to Prorated Billing?\">How does ASC 606 relate to Prorated Billing?<\/span><\/h3><\/div><div id=\"5-content-21552\" class=\"sh-content 5-content sh-hide\" style=\"display: none;\"><\/p>\n<p>According to <a href=\"https:\/\/www.mooninvoice.com\/blog\/gaap-accounting-principles\/\">GAAP<\/a>, ASC 606 highlights the revenue recognition whenever the company delivers the service. It says companies must calculate revenue based on how much a portion of the service is provided and not by the number of days. Therefore, every company following prorated billing practices must comply with ASC 606 guidelines.<\/p>\n<p><\/div>\n<div id=\"6-link-21552\" class=\"sh-link 6-link sh-hide\"><h3 onclick=\"showhide_toggle('6', 21552, 'How do you prorate hourly pay?', 'How do you prorate hourly pay?'); return false;\" aria-expanded=\"false\"><span id=\"6-toggle-21552\" class=\"sh-toggle\" data-more=\"How do you prorate hourly pay?\" data-less=\"How do you prorate hourly pay?\">How do you prorate hourly pay?<\/span><\/h3><\/div><div id=\"6-content-21552\" class=\"sh-content 6-content sh-hide\" style=\"display: none;\"><\/p>\n<p>First, determine the pay based on the actual hours your employee worked. You need to find the employee&#8217;s hourly rate and then, multiply this rate by the number of hours he or she worked. For example, if an employee earns $20 per hour and has completed only 15 hours instead of the usual 42 hours in a week, their prorated pay would be $20 \u00d7 15 = $300. This is how you can accurately compensate an employee for the time they have worked.<\/p>\n<p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>What Is Prorated Billing? Prorated billing is a billing method that adjusts the price in order to match what actually has been used. As its name suggests, it allows businesses to prorate a bill so that customers can pay for services they have used and not for the entire billing period. Implementing prorated billing means&hellip; <a class=\"more-link\" href=\"https:\/\/beta.mooninvoice.com\/blog\/prorated-billing\/\">Continue reading <span class=\"screen-reader-text\">What Do You Mean By Prorated Billing &#038; How It Works?<\/span><\/a><\/p>\n","protected":false},"author":5,"featured_media":21554,"comment_status":"open","ping_status":"open","sticky":false,"template":"single-custom-post.php","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-21552","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","entry"],"acf":[],"_links":{"self":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/posts\/21552","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/comments?post=21552"}],"version-history":[{"count":0,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/posts\/21552\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/media?parent=21552"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/categories?post=21552"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/tags?post=21552"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}