Business Glossary

process of partitioning a valuation account and assigning the resulting subsets to periods of time. Allocation includes the assignment of assets to expense as well as the assignment of liabilities to revenue over a time frame. Examples of the former are the depreciation of a fixed asset or the amortization of an intangible asset over the period benefitted. An example of the latter is reflecting unearned fee revenue (deferred revenue) into revenue over the period the services are performed. Allocations result from applying rules for the assignment of costs to products or period expenses and the assignment of the value of the product to specific periods as revenue.

revocation of a policy by an insurance company that returns to the policyholder the unearned premium (the portion of the premium for the remaining time period that the policy will not be in force). There is no reduction for expenses already paid by the insurer for that time period.

provision in many property insurance policies that spreads the obligation to pay a claim among various insurers covering that claim in proportion to the insurance each has written on the property. For example, there are three different policies covering a $130,000 building. Co. A wrote a $60,000 policy, Co. B a $50,000 policy, and Co. C a $20,000 policy. A fire results in $25,000 damage. The loss would be spread in the same ratio as the coverage: Co. A's share would be $11,750, or 47%; Co. B would pay $9500, or 38%; and Co. C would pay $3750, or 15%. One purpose of this clause is to prevent an insured from capitalizing on a loss. In the case cited, the insured could collect the full amount ($25,000) twice from the first two insurers, and $20,000 from the third, giving him or her $70,000 to cover a $25,000 loss.

In general: allocate proportionally.
Magazines:process of calculating the price or term of a subscription, based upon a payment or a period of time other than the standard one-, two-, or three-year term and price offers. For example, if a magazine costs $24 for 12 issues and only 6 issues are ordered, the prorated price is $12. Similarly, if $18 is sent by the subscriber in payment, the term of the subscription will be prorated to 9 issues. Marketers usually prorate the term of subscriptions for which an underpayment or overpayment is received, rather than refund the difference or try to collect the remaining amount due.

basis for allocating an amount proportionately to the items involved. An amount may be proportionately distributed to assets, expenses, funds, and so forth. For example, at year end, underapplied overhead may be allocated to work-in-process, finished goods, and cost of sales based on the dollars or units applicable to those accounts. Assume underapplied overhead is $1000, work-in-process is $4000, finished goods is $5000, and cost of sales is $1000. The pro rata charge to work-in-process, for instance, would be $400 ($4000/$10,000 x $1000).The journal entry is: