What it means
In its most common use, arrears means money that should have been paid and has not been. A customer who is two months behind on a $3,000 monthly rent has arrears of $6,000.
The amount keeps growing for as long as the unpaid instalments pile up. For a business, arrears matter because they tie up cash and signal risk.
A rising level of customer arrears suggests that clients are struggling or that credit control is weak, and the balance may eventually have to be written off as a bad debt. On the other side, a company in arrears with its own suppliers, landlord or tax authority may face penalties, interest and damaged relationships.
The second meaning is about timing. Paying in arrears means paying after the period has ended, as when wages are paid at the end of the month for work already done, or interest is paid at the end of a quarter.
The opposite is paying in advance, as with rent paid at the start of the month. The term also appears in specific settings.
Preference shares can carry cumulative dividends, meaning that unpaid dividends build up as dividends in arrears and must be cleared before ordinary shareholders receive anything. Mortgage and loan contracts define arrears in their own terms, often triggering fees or default after a set number of missed payments.
Managing arrears is a practical credit control task. Typical steps are sending reminders, agreeing a payment plan, charging late interest where the contract allows it, and escalating to collections or legal action as a last resort.
Accountants track arrears using an ageing report, which groups overdue balances by how long they have been outstanding, such as 1 to 30 days, 31 to 60 days and over 60 days. The older a balance gets, the lower the chance of collecting it in full.
That is why many companies make a provision for doubtful debts that rises with the age of the overdue amount.
In practice
Real-world examples
Example 1
A printing company sends invoices on 30-day terms. A customer owing $14,000 has not paid for 75 days, so the accounts team records it as arrears and begins its reminder process. The credit controller phones the customer to agree a payment date.
Example 2
A manufacturing firm pays its factory staff on the last working day of each month for the month just worked. Finance describes this as paying wages in arrears. The company therefore carries accrued wages on its balance sheet at each month end.
Example 3
A company with cumulative preference shares skips its $40,000 annual preference dividend for two years. The $80,000 now owed is dividends in arrears, and ordinary shareholders cannot receive anything until it is cleared. The company must settle those dividends in arrears before it can pay anything to ordinary shareholders.
Think of it
Arrears means you're behind on payments-owing money that should have been paid already.
Formula
Calculation
Arrears = Total amount due to date - Total amount paid to date
Suppose a tenant owes monthly rent of $3,000 and the lease started 6 months ago. Total due = 3,000 x 6 = $18,000. The tenant has paid $12,000 so far. Arrears = 18,000 - 12,000 = $6,000, which equals two missed months. If the lease charges a late fee of 1.5% a month on the overdue amount, one month's late fee on $6,000 would be 6,000 x 0.015 = $90.Case study
Seen in the real world
Larkfield Fitness is an illustrative, fictional chain of gyms that collects membership fees by monthly direct debit. After a price rise, the number of members with failed payments increased, and total arrears grew from $18,000 to $55,000 over a quarter.
The finance manager analysed the balances by age and found that most of the increase came from members two or more months behind. She introduced an automatic reminder after seven days, a payment plan option and a freeze on facility access after 60 days.
Within two quarters arrears fell to $22,000. In this illustrative example, the finance team did not need to change prices again, because earlier action on small overdue amounts was enough to recover most of the cash. The company also added a short note to each reminder offering a call with the accounts team, which helped members who had simply forgotten or hit a cash shortage.
Watch out
Common mistakes
- Assuming that arrears and bad debts are the same thing, when arrears are overdue but possibly collectable and only become bad debts if recovery fails.
- Ignoring small overdue balances until they grow, when early contact is the cheapest and most effective way to collect.
- Confusing paying in arrears with being in arrears, when the first is a normal payment timing and the second means payments are late.
Questions
People also ask
What does it mean to be paid in arrears?
It means payment is made after the work or period is completed, as with monthly salary paid at the end of the month.
How are arrears shown in the accounts?
Overdue customer balances sit within trade receivables, and overdue supplier balances sit within trade payables, usually with an ageing analysis.
What are dividends in arrears?
They are unpaid cumulative preference dividends that accumulate and must be settled before any dividend goes to ordinary shareholders.
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