What Does Paid in Arrears Mean? Arrears Definition

Arrears refers to a debt or payment that is still outstanding after the payment due date has passed. Moving onto the next example, we see that arrears is not solely used to describe payroll. That payment reflects owning the title of property for the previous tax year, which runs from Oct. 1 – Sept. 30. We can say with the utmost certainty today that that loss changed the course of their future.

Most companies pay in arrears because it reduces confusion when processing payroll. Paying in advance can result in overtime hours, paid leave, or sick leave being miscalculated. This can disrupt a business’s cash flow and leave an employee with a pay check made out to the wrong amount.

Types of Arrears in Finance

Payroll in arrears means you pay an employee for work they completed in the previous pay period. Whilst some arrears payments are agreed upon, “payment in arrears” can also refer to late payments. Common reasons for late payments include invoice errors or a dispute regarding the product or service.

They do, however, fall into arrears if you don’t pay them by the due date. If you continue making regular payments each month after that, you are still in arrears for $500 until the time you make up the payment you missed. Similarly, if you paid $300 of that Jan. 15 payment, you are in arrears for $200 as of Jan. 16 until the time you pay it off and bring your account up to date. 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.

Payment in arrears vs. in advance vs. current

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. Even if you continue paying the rest of your bills on time after missing that $1,000 payment, you are in arrears for $1,000 until you make it up or pay whatever sum remains if you pay part of it. A business would bill in arrears when they’ve already provided a product or service and are requesting payment. Billed in arrears would typically be referenced by a seller, supplier, or contractor because they are the ones billing their clients for their services. Most of us pay in arrears when we pay our monthly electric bills or utility bills. Since those bills typically ask for payment after services have been extended, those bills are being paid in arrears by customers.

They may also pay employees in arrears, which means employees don’t receive the money they’ve earned until after the pay period. In a business that relies on subscriptions, “billing in arrears” means sending the customer their bill after they’ve already received the service bill in arrears or product. This approach works well for businesses with usage-based plans since the bill mirrors the customer’s actual usage. However, it’s important to note that this method can cause cash flow to slow down, as the business provides services before receiving payment.