Paid In ArrearsDefined along with Examples

If you’re someone who pays service providers only after the service has been provided, you might be familiar with the concept of “paid in arrears”.

It’s essentially the opposite of “paid in advance” wherein you make payments before the delivery or completion of the service.

This concept also applies to purchases on credit.

For example, when you purchase a product on credit, you only pay after your receive the product (or invoice, depending on the agreement).

Basically, if you make payments only after the delivery of goods or services, then you’re “paying in arrears”.

Paying in arrears can either be intentional or unintentional. It’s intentional when it is included in the agreement between the customer and vendor.

For example, the credit terms of purchase may include a clause in which the customer has to pay within 30 days after the fulfillment of the order.

On the other hand, it’s unintentional if the delay in payment isn’t covered by any agreement.

For example, when your internet bill is due every 5^th of the month, but it’s already past that and you have yet to pay it.

In this article, we will be discussing the concept of “paid in arrears”.

What does it mean for you as a consumer and/or vendor?

Can it provide benefits when you properly incorporate it into your business?

How does one account for payment in arrears?

How can a business take advantage of “paid in arrears”?

We’ll try to answer these questions as we go along with the article.

What Does “Paid in Arrears” Mean?

In general, when payment is made only after the completion of a transaction, the payment is said to be paid in arrears.

This concept also applies to billing wherein you only bill your customers after completing a service or delivering a product.

Payment in arrears can either be intentional or unintentional:

When payment in arrears is intentional

Payment in arrears is intentional if it’s in the agreement between the customer and the vendor.

For example, when you purchase a product on credit, the vendor may allow you to pay the bill within 30 days after the delivery of the product.

In this example, the payment in arrears is intentional as it was agreed upon by both the customer and the vendor.

Another example would be is when you only pay a service provider only after the completion of the service.

The concept of arrears is also common in the context of payroll.

It’s when an employer pays its employees’ salaries and wages of a previous pay period rather than the current one.

For example, an employer may pay the previous month’s salary every 10^th of the current month.

Such as when the employer pays the entire salaries and wages of February on March 10.

In this case, the payment of salaries and wages is a payment in arrears as it was only made after the employees provided labor and services.

When payment in arrears is unintentional

Payment in arrears is unintentional when the delay in payment is not covered by any agreement.

In other words, the payment is late just because it’s late. In this context, payment in arrears isn’t desirable as it paints a bad picture.

Additionally, the delay in payments may result in late fees and penalties.

But most importantly, your reputation will take a hit.

Vendors or creditors might hesitate to grant you credit as a result.

Payment in arrears will continue to accrue from the first payment until you finally address it.

Every new payment applies to the oldest payment due until you “catch up” with your payments.

For example, you pay your internet bill every 5^th of the month.

However, you were unable to pay your internet bill for April.

You’re still able to pay your dues for the following months. In such a case, though you’re able to pay properly for the following months, the fact that the April bill remains unaddressed means that you are paying in arrears.

On the part of the biller, the payment will apply to the oldest payment due.

The Benefits of Paying in Arrears

Paying in arrears can be beneficial if it’s intentional.

It allows a business or individual a certain amount of time to gather the necessary amount of cash before paying.

For example, when the credit purchase may have a term of net 30.

This means you have to pay the bill within 30 days after the delivery of goods or services.

This allows you more time to gather the necessary funds to pay the bill. It also allows for a more flexible cash flow.

Do note though that not all vendors allow payment in arrears.

Also, be careful of missing out on due dates.

Late payment may result in late fees and penalties, which are just unnecessary expenses.

Billing in Arrears: Pros and Cons

The concept of arrears can also apply to billing.

Billing in arrears refers to charging your customers only when completing a service or delivering a product.

For example, let’s say that you’re a website developer and you only bill your customers after completing your job.

Billing in arrears allows for better billing accuracy. If you only bill after completing a job, you know how much exactly your going to charge.

It allows for fewer instances of overcharging or undercharging.

On the other hand, billing in arrears means that you won’t be receiving payment immediately.

This will the flexibility of your cash flows. In the worst case, your customer may refuse to make payments even if the product or service is successfully delivered.

As such, billing in arrears is only recommended for businesses that have established and trusted customers.

They carry less risk of default because of their relationship with their customers.

Arrears in Payroll

There’re a lot of things to consider when accounting for payroll (especially for a small business).

First, you have to consider federal and state tax withholdings.

Then, you have to account for payroll taxes, benefits deductions (e.g. health insurance, retirement fund), and other mandatory and voluntary deductions.

Accounting for all of these can be time-consuming, especially for a small business.

To address this predicament, a business may opt to pay its employees in arrears.

Basically, a business pays the salaries and wages of the previous pay period rather than the current one.

Arrears in payroll provides several benefits such as better accuracy of hours, a more complete calculation of pay, easier management of payments, etc.