For example, if your $500 loan payment is due on Jan. 15 and you miss the payment, you are in arrears for $500 as of the next business day. This is a form of advance payment, although it doesn’t cover the services in full. After the client’s arrangement with the law firm ends, they’ll be billed for the total services rendered minus the retainer. Arrears isn’t only convenient for paying service industry workers.
You’ll then have to project what an employee will work on Friday, Saturday, and Sunday. If they take a sick day or work overtime one of those days, they will be overpaid or underpaid for that pay period. The two most popular types of billing processes conducted by small businesses are billing in advance and billing in arrears. Simply put, billing in advance is collecting payments before delivering a product or service. Billing in arrears is collecting payments after providing a product or service. Paying in current falls between paying in arrears and paying in advance.
What It Means to Be in Arrears, With Example
If some of the drawbacks of billing in arrears make you skeptical, you may be wondering how to mitigate these disadvantages. Billing in arrears is an excellent option for many businesses – particularly by the industries mentioned previously. While it may have a ton of advantages, it also has some downsides that need acknowledgment. If you decide that you prefer to be paid in arrears rather than use these alternatives, there are plenty of ways to mitigate the risk.
- These systems let you control when your customers receive their invoices.
- So, if you fail to pay your $700 mortgage payment by its June 31 due date, your account will be in arrears for $700 by the following business day.
- An example of a payment in advance is rent, which is paid at the start of the month.
- The concept of arrears also applies when a publicly-traded company issues dividends to its investors.
- In terms of payroll, arrears refers to payment after the work is completed.
There might be times when regular payment is behind because it is overdue. When the customer does not send one month’s payment on time, their next payment is made in arrears. For small business owners, running payroll in arrears is more simple than calculating current pay. Many companies choose to pay their workers in arrears because it gives them flexibility with their cash flow, simplifies payroll, and helps ensure accuracy in accounting.
Why would a paycheck be paid in arrears?
Other examples of payments that are made in advance include insurance premiums, internet service bills, prepaid phone service, lease, prepaid electricity bills, etc. Payment in arrears is a payment that is made once a service has been offered. For salaried employees, payments are made once the service has been delivered by the employee to the employer. If this billing method works fine without serious set-backs, it’s probably the best option for you. If that’s not the case, then you may want to opt for upfront payments. To better understand the meaning of billing in arrears, let’s compare it with payments in advance.
This is in contrast to billing in advance, which requests advance payment to cover the cost of expenses and supplies. When you are paid in arrears, you don’t receive this payment until after you’ve delivered your goods or services. On the other hand, when employees are paid in current, it can make processing payroll more bill in arrears challenging, especially for commissioned and hourly employees. Because there’s no gap between the end of a pay period and the day employees get paid, employers will have to predict employee hours. For example, if a workweek is Monday through Sunday and you pay employees every Friday, you’ll have to process payroll early.