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+# Subscription Proration Engine with Mid-Cycle Changes
+
+This document specifies the design, mathematical model, backend service architecture, and smart contract integration for SubTrackr's mid-cycle proration engine.
+
+## Overview
+
+When subscribers change plans or billing intervals mid-cycle, the proration engine calculates exact prorated charges for plan upgrades or prorated credits for plan downgrades, ensuring fair and transparent billing.
+
+---
+
+## Proration Principles & Formula
+
+1. **Unused Value of Current Plan**:
+   $$\text{Unused Value} = \text{Old Price} \times \frac{\text{Remaining Seconds}}{\text{Total Period Seconds}}$$
+
+2. **Prorated Value of New Plan**:
+   $$\text{Prorated Value} = \text{New Price} \times \frac{\text{Remaining Seconds}}{\text{Total Period Seconds}}$$
+
+3. **Net Proration Adjustment**:
+   $$\text{Net Adjustment} = \text{Prorated Value} - \text{Unused Value}$$
+   - If $\text{Net Adjustment} > 0$: Prorated charge (Upgrade).
+   - If $\text{Net Adjustment} < 0$: Prorated credit memo (Downgrade).
+
+---
+
+## Architecture & Components
+
+### 1. Backend Proration Billing Module (`backend/services/billing/proration.ts`)
+
+- **Class `ProrationEngine`**:
+  - `calculateMidCycleProration(request)`: Main calculation engine handling mid-cycle changes with exact second precision.
+  - `generateCreditMemo(subscriptionId, amount, reason)`: Generates credit memos for unused balances.
+  - `applyCreditBalance(chargeAmount, creditMemo)`: Deducts credit balance from future charges.
+  - `calculateNetProration(subscription, changes)`: Aggregates net proration across multiple sequential mid-cycle modifications.
+
+### 2. Soroban Smart Contract (`contracts/subscription/src/proration.rs` & `lib.rs`)
+
+- **Functions**:
+  - `calculate_proration`: On-chain proration calculation.
+  - `preview_proration`: On-chain preview before confirming changes.
+  - `change_plan`: Executes mid-cycle plan changes on-chain, applies credit memos or processes upgrade charges, and updates subscriber index.
+
+---
+
+## Code Example
+
+```typescript
+import { ProrationEngine } from './backend/services/billing/proration';
+
+const result = ProrationEngine.calculateMidCycleProration({
+  subscription: mySub,
+  newPrice: 29.99,
+  effectiveDate: 'immediate',
+});
+
+console.log(result.description);
+// Output: Prorated charge of $12.50 for mid-cycle plan upgrade (15 days remaining)
+```