Though you don’t give your employees payment until after the pay period, the wages are not overdue. Depending on your business, you might extend credit to customers so they don’t pay right when they receive a good or service. When you invoice a customer, you include payment policy terms that detail when the money is due. If they don’t pay until after the deadline, you are paid in arrears.
In contrast, advance payments are given upfront before goods or services are provided. If you work in payroll or accounting, you’re probably familiar with the phrase “paid in arrears.” But this knowledge shouldn’t be limited to the accounting department. The term has implications for business-wide billed in arrears meaning activities, so it’s essential to understand what it means and how it applies to your business. “Paid in arrears” refers to payments made after goods or services have been delivered. The financial term; “in arrears” means that a payment is behind, and can be applied to both billing and paying.
Paid in arrears: Definition, how it works and tips from the experts
While it does include overdue and missed payments, it also encompasses paying a bill after a service has been rendered. Seeing “arrears” in a contract or agreement simply indicates that the payment will not be made in advance. When two parties come to an agreement in a contract, payment is usually made before or after a product or service is provided. Payment made before a service is provided is common with rents, leases, prepaid phone bills, insurance premium payments, and Internet service bills. When the bill becomes overdue—say 30 days past the due date for payment—the account falls into arrears and the account holder may get a late notice and/or penalty. For this matter, it’s also common practice to hire other service-based businesses to help you with your billing.
According to the invoice terms, they may have 30 or more days to pay the bill. If the supplier doesn’t receive payments before the pay period ends, the account will be in arrears. This means the employees are paid for work completed in a previous pay period. For example, employees may receive their monthly salary on February 1 for work carried out throughout January. In this case, they would be getting paid for work already completed.
What does Paid in Arrears mean in Accounting?
After highlighting the benefits of billing in arrears, we should also examine the potential challenges that this model may present. While billing in arrears has numerous benefits, it also presents certain challenges, which we will explore in the following section. You might not be used to this being referred to as “paid in arrears,” as even some HR professionals aren’t accustomed to using arrears in their regular vocabulary. But in the case of your paycheck being “delayed,” that’s actually being paid two weeks in arrears.
In case, you pay after a service has been received, you will be paying in arrears. As a business owner or consumer, you probably are billed in arrears for things like utilities. This ensures you pay for the service you’ve received, rather than underpaying or overpaying. Billing in arrears is often more efficient for ongoing services where usage varies.
