What are Arrears? Whether you are running a business or not, there are certain terms that you need to know what they mean. Because you might just come across it at any time and if you do not know the message, it might be fun. Every business person needs to know what it means so that they can better manage their business well. As a result of that, today we are going to take a look at what it is.
So, if you want to learn everything there is to know about this financial term, keep reading until the end. Because we are going to be showing everything there is to know about it.
What is Arrears?
Arrears, as we know it, is a financial term that is mostly used in accounting and it refers to the legal status of the payment in relation to its due date. In layman’s terms, an arrear is a payment that has not yet been made and the due date to make the payment has passed. When a financial obligation or liability that needs to receive payment has not yet been received, it is said to be in arrears.
Basically, it is overdue payment. Missing your monthly mortgage payment or rent, for example, is an example of one. Then those accounts go into arrears. In addition, if a service is rendered and payment is due after that, and the payment is due at the end of the month, it is said to be in arrears.
How do Arrears work?
Businesses can receive arrears. It does not mean that it is a bad thing or that the business is not profitable. Businesses make payments in arrears, just like when employees do not receive the money that they earned until the pay period is over. The bottom line is that there may be a good number of reasons for a business to make payments in arrears. That does not mean business is bad.
It may or may not have a negative effect on a business, but this is totally dependent on the terms that are in use. When it comes to cases like bond arrears, the term can simply be used to refer to payments that are made at the end of a specific period. That being said, you should keep in mind that making payments in arrears can increase your interest rate and even affect your credit.
What is payment in Advance?
Most people already know what “payment in advance” means because, unlike arrears, it doesn’t have a big grammar to it. Making payments in advance means simply that you are paying for a service that has not yet been rendered. It is the direct opposite of making payments in arrears. A typical example is when a tenant pays rent ahead or before the year starts to the landlord. That payment is said to be in advance.
What is payment in Arrears?
Just as I have mentioned above, making payments in arrears is the opposite of making payments in advance. This is because instead of payments being made before the service is rendered, payments are being made after the service has been rendered. A good example of that is when both parties agree to a contract that says after the job is done, the person makes payments to the contractor for the job they did.
Types of Arrears
There are basically three types and they are listed and explained below:
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Annuity in Arrears
These are payments that are of an equal amount and that are due to be paid at the end of the month, such as loan repayment. When these types of arrears are due at the end of the month, they are known as annuities.
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Dividends in Arrears
When dividends are due and have not yet been paid to the preferred shareholders, it is known as a dividend in arrears.
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Interest in Arrears
This refers to interest on loans that are due to be paid at certain dates, usually at the maturity of the loan. These types of arrears are not paid in bits and pieces, they are paid once at the loan maturity.
Is it bad to be in Arrears?
Being in arrears does not always have to be a bad thing. In most cases, being in arrears is a good thing, such as in trading bonds. When trading bonds, payments are usually made at the end of a specific period, so it is not actually a bad thing. Also, when it comes to mortgage interest payments, they are also being paid in arrears. It is only bad when the due date of payment has passed.
Why do most companies pay in Arrears?
Most companies do make their payments in arrears. This is very beneficial to them as it provides them with the time they need to get the cash sorted out. They do not want to pay all their obligations with the current cash flows that they have at hand, which might be needed later. So they simply wait or accrue the chat for a later date of payment. so that they can accumulate and earn interest before paying out.
FAQs
What does being in arrears mean?
When a payment is in arrears, it means that the time frame that was scheduled for that payment to be made has been exceeded without the payment being made. It is when a business is behind on payments of certain things. When an account or payment is in arrears, any subsequent payment is paid to clear the oldest payments that have accrued.
How do you use arrears?
Most people make use of arrears, and they do not know that one of the ways many people use arrears is in their payment of mortgages. Also, if your rent is due but you have not yet paid and are still living in the apartment, you are in arrears.
Is the salary paid in arrears?
Yes, when you have work for the whole of the month and then you are paid at the end of the month or a little bit further, it is considered arrears. Most businesses, as we’ve seen in this article, make payments in arrears.
