In accounting, “arrears” refers to an outstanding or overdue payment obligation, typically associated with unpaid debts, dividends, or rent. Arrears can occur when a person or business fails to fulfill their financial commitments on time. The term is commonly used to describe the status of payments that are supposed to be made periodically, such as interest or lease payments, but have not been paid as scheduled.
When a payment is in arrears, it means that the payment is past due, and the individual or business owing the payment may face penalties, late fees, or other consequences, depending on the nature of the obligation and the terms of the agreement. In some cases, arrears can also negatively affect the debtor’s credit rating and future ability to obtain financing.
Example of Arrears
Let’s say John rents an office space for his business, and he agreed to pay the landlord $2,000 per month on the 1st of every month. Unfortunately, due to some unexpected cash flow issues, John is unable to make the rent payment for March on time. As a result, he now has an overdue payment obligation.
On April 1st, John’s rent for March is considered to be “in arrears.” He now owes his landlord the $2,000 for March, along with the rent for April, which is also due. In addition to these amounts, the landlord might impose a late fee on the overdue payment, further increasing John’s financial obligation.
In this example, John’s overdue rent payment for March is considered to be in arrears. He must address the issue by paying the overdue amount, along with any penalties, to avoid potential negative consequences, such as eviction or damage to his credit rating.