The arrearages legal definition is the amount of a loan, shares of a preferred stock, or any other form of credit which is overdue. Arrears is another term that means the same thing as arrearages. When a company doesn't pay out dividends to shareholders, these dividends accumulate, meaning that in the future it's required that the company pay arrearage to stockholders before current dividends.

The difference between arrears and arrearage is subtle, but important. Arrears refers to the actual unpaid obligation to a debt, while arrearage refers to the condition of being in debt. Thus, arrearage means one is in arrears. Learn more about what it means to be in arrears, and all you need to know about arrearage, what it means for the debts you owe or are owed, and the effect it has on your finances.

Being Paid in Arrears

There are a couple of potential meanings to the phrase, “paid in arrears.” It often refers to the practice of compensating the provider of a service after they have completed the agreement of a contract. Such agreements state that payment will be made after a certain period expires, as opposed to in advance. This can apply to contracted work or payroll.

Arrears can also refer, however, to the condition of a business being behind on owed payments. In such a case, arrears amounts accumulate from the date a payment has been missed. Accounts that are paid from the date of the oldest payment, and continue to be considered arrearage until the count is brought current.

Arrearage and Accounting

Arrears also form an important part of accounting practices, which allows for a better way of managing small business cash flow. Instead of paying on delivery for services rendered, many small businesses institute an arrearage policy, paying on a net 30, net 45 or other basis, meaning that it pays within a set number of days after the invoice is received or after delivery, as specified in the agreement. A net 30 arrearage, for example, promises payment within 30 days.

This allows the business to acquire payment from its own debtors before paying their creditors. It basically allows space to get what you need before meeting your obligations.

Arrearage in Payroll

In payroll, arrearage refers to what is commonly known as “paying a week behind.” Instead of paying employees on their current pay, you are paying for the week (or other pay period) previously completed. The advantages to this are that it enables more accurate tracking of payroll:

  • With a current pay arrangement, employers need to submit timesheets for employees before the work week is finished.
  • This can lead to inaccuracies in benefits, tax, and other important deductions.
  • Paying in arrears ensures a greater degree of accuracy for all aspects of the pay period, and it's a benefit to employees, who receive an extra paycheck after leaving a job.
  • There are downsides to this form of payment:
    • Employees who don't work set hours every week (such as hourly part-time workers) need to be aware of how their pays run so they can keep track of what to expect in a check.
    • Employees who don't work the requisite hours to qualify for their voluntary deductions will come out of the following period's check.

Managing Arrearage

If you're paying in arrears, whether it's payroll or for services rendered, it's important to stay up to date on your accounts. Conduct regular accounts payable audits to be sure you are current. Keep tabs on everyone that owes you money, and if your debtors are constantly behind on payments it could be a sign of a serious problem.

If you note that a debtor is seriously in arrears, you may consider suspending business with them until they bring their accounts current. This will protect your business.

When You Are in Arrears

It's important to remember when you're in arrears that just because you have begun making regular payments, this doesn't mean your accounts are up to date. If you make only minimum payments, your account will remain past due. It's important to catch up on your arrearage as soon as possible, to avoid serious issues with your company's credit and accounts.

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