Arrear Definition & Meaning

When two parties come to an agreement in a contract, payment is usually made before or after a product or service is provided. Payment made before a service is provided is common with rents, leases, prepaid phone bills, insurance premium payments, and Internet service bills. When the bill becomes overdue—say 30 days past the due date for payment—the account falls into arrears and the account holder may get a late notice and/or penalty. In scenarios such as payroll distribution, an agreed-upon payment in arrears is a useful tool that gives businesses extra time and flexibility. To make sure you are up to date on your organization’s payments and avoid falling into arrears-territory, conduct regular audits of your accounts payable.

Discover why our clients return to us and recommend us to their friends and acquaintances. Contact us today and put one of San Diego’s preeminent family law firms to work for you. First, take a look at the below example sentences for arrears to learn how to use this term. Then, try coming up with your own example sentences using the word arrears.

In some cases, such as bonds, arrears can refer to payments that are made at the end of a certain period. Similarly, mortgage interest is paid in arrears, meaning each monthly payment covers the principal and interest for the preceding month. Arrears is a financial and legal term that refers to the status of payments in relation to their due dates. The word is most commonly used to describe an obligation or liability that has not received payment by its due date. One week in arrears means your organization pays employees seven days after the week during which they completed their hours. Many companies choose to pay their workers in arrears because it gives them flexibility with their cash flow, simplifies payroll, and helps ensure accuracy in accounting.

Tips for paying in arrears

Arrears also applies to the financial industry in the case of annuity payments. An annuity is a transaction of equal amounts occurring at equal intervals over a certain period of time. It’s a strange-to-pronounce and possibly unfamiliar term, but being paid in arrears is a common practice that you have likely experienced at some point. Simply put, it means to pay for goods or services after the terms have been met or the due date has passed. It’s not unusual to see paid in arrears pop up in small business accounting or payroll, and there are several other instances where you may find yourself interacting with this term.

  • If your $1,000 bill payment is due on September 15 and you miss the payment, you are in arrears for $1,000 the following business day.
  • Arrears may also refer to the late distribution of the dividends of cumulative preferred stock.
  • This structure translates over to business payments and accounting as well.
  • The same distinction holds for other interest rate derivatives, e.g. caps, floors and swaptions.
  • An annuity is a transaction that occurs in equal intervals and in equal amounts over a defined period of time.
  • For example, an annuity transaction may involve equal payments of $300 over a period of 10 years.

Call-in arrears refers to the amount that a defaulter shareholder has not paid on the call money by the due date. It is calculated by deducting the paid-up capital from the called-up capital. The issuer may recover the unpaid call money if the received shares are forfeited. If there is no difference between the called up capital and the paid-up capital, the call-in arrears will be zero.

This means an employer would need to submit an employees’ time before the they even finish their work week. The payment may also be referred to as a singular arrear not classified as a late payment. Other examples of payments in arrears include postpaid phone service, postpaid water bills, postpaid electricity bills, property taxes, etc. Being in arrears may or may not have a negative connotation depending on how the term is used.

The Meaning of Arrears: What It Is and How To Use It

The largest benefit businesses reap from paying in arrears is maintaining accurate payroll and bookkeeping numbers. Before issuing paychecks, accounting departments are able to factor in employee circumstances such as paid and unpaid time off, tips, commissions and overtime. Having the correct numbers to work with ends up saving businesses both time and money in the long run, since errors are less likely to occur.

What is ‘Arrears’

Federal law precludes any person from discharging such a “family” obligation in any Chapter 7, Chapter 13 or other Bankruptcy case. Child support arrears never go away unless they are paid or there is some agreement reached to discharge the obligation by the person owed the support arrears. In some contexts, the connotation is negative, such as when your account is in arrears after missing several consecutive payments. Overall, though, the key consideration is understanding arrear’s meaning as it applies to you and knowing whether paying in arrears benefits your business.

Call-in Arrears

Another reason companies tend to pay their workers in arrears is to have more flexibility with their cash flows. When an organization pays their employees in arrears, they free up time to pay obligations and earn interest on their cash — a double win. In the world of payroll, paid in arrears means you pay your employees after they complete their work. Choosing to pay in arrears affects your operations in both payroll and accounting.

In the majority of instances, being paid in arrears allows an employer anywhere from two weeks to 30 days to complete employee payout. This structure translates over to business payments and accounting as well. Employees are not paid in advance for their work, but rather once a job is done or the pay period ends. Money not paid when due, usually the sum of a series of unpaid amounts, such as rent, installments on an account or promissory note, or monthly child support. If the custodial parent would like to forgive child support arrears, they can do so by submitting a waiver. Each state has its own child support laws, so check the rules in your state regarding child support arrears and waivers.

Accounts Paid After Service is Provide

The word arrears means “end of period” when referring to annuities (an annuity is series of equal amounts occurring at equal time intervals, such as £1,000 per month for 20 years). If the recurring amount comes at the end of each period, the annuity is described as an annuity in arrears or as an ordinary annuity. For example, you borrow £10,000 on September 30 and your first monthly payment will be due on October 31, the second payment will be due on November 30, and so on. Assigned arrears refer to unpaid child support payments that will go to the state for financially supporting a child. In this situation, the custodial parent used public assistance because they didn’t receive the child support they need to care for their child.

Arrears

Therefore, it’s important to know what paid in arrears means and the pros and cons of paying in arrears. However, maintaining a healthy cash flow means that you need to carefully manage the balance between collecting payments from people who owe you money, and ensuring that arrears do not occur as a result of missed payments. These can put impact of mobile technology in business communication a squeeze on your cash flow, as they usually come with penalty fees. For example, an annuity transaction such as a mortgage may involve equal payments of $1,200 over a period of 30 years. If the annuity payment is made at the end of a fixed period, rather than at the start, it is referred to as an annuity in arrears or an ordinary annuity.

By paying employees in arrears, employers don’t have to worry about miscalculating or forgetting to consider paid time off (PTO), overtime, and sick leave. If the company’s financial situation improves in the future, the board of directors will authorize the payment of all or a portion of the cumulative dividends. Preferred stockholders must be paid first before any payments are made to common stockholders. The paid dividends will be recorded as a short-term liability in the balance sheet. An account can also be said to be in arrears if the service has already been rendered, and the payment is due to be made at the end of the agreed period.