Arrears

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Arrears (also sometimes known as an arrearage) is a legal term for the part of a debt that is overdue after missing one or more required payments. The amount of the arrears is the amount accrued from the date on which the first missed payment was due. The term is usually used in relation with periodically recurring payments such as rent, bills, royalties (or other contractual payments), and child support.

Payment in arrears is a term describing payments made after a service has been provided. In this case use of the word "arrears" does not imply any breach.

Definition[edit]

The term in arrears is also used in many contexts to refer to payments made at the end of a period, as distinct from in advance, which are payments made at the start of a period.[1] For instance, rent is usually paid in advance, but mortgages in arrears (the interest for the period is due at the end of the period). Employees' salaries are usually paid in arrears.

In other contexts, payment at the end of a period is referred to by the singular arrear, to distinguish from past due payments. For example, a housing tenant who is obliged to pay rent at the end of each month, is said to pay rent in arrear, while a tenant who has not paid rental due for 90 days is said to be three months in arrears. Precise usage may differ slightly (e.g. "in arrear" or "in arrears" for the same situation) in different English-speaking countries.

Accounting[edit]

Calls in arrears in balance sheet[edit]

When any shareholder does not pay its call money to company on its due date. At that time, company will deduct that calls in arrears from total called up capital for showing net paid up capital in balance sheet.[citation needed]

Dividends[edit]

In accounting, arrears is used in at least three destinations. One use involves the past, omitted dividends on cumulative preferred stock. If a corporation fails to declare the preferred dividend, those dividends are said to be in arrears. The dividends in arrears must be disclosed in the notes (footnotes) to the financial statements. (Cumulative preferred stock requires that any past, omitted dividends must be paid to the preferred stockholders before the common stockholders will be paid any dividend.)

This is the "past due" sense.

Annuities[edit]

Another use of the word arrears occurs with annuities (an annuity is series of equal amounts occurring at equal time intervals, such as £1,000 per month for 20 years). If the recurring amount comes at the end of each period, the annuity is described as an annuity in arrears or as an ordinary annuity. A loan repayment schedule is usually an annuity in arrears. For example, you borrow £10,000 on September 30 and your first monthly payment will be due on October 31, the second payment will be due on November 30, and so on.

This is the "end of period" sense.

Derivatives[edit]

A In-arrears swap is an interest rate swap that sets (fixes) the interest rate and pays the interest both at the end of the coupon period. In contrast, a standard swap sets the interest rate in advance, at the beginning of the coupon period, and pays the interest in arrears, at the end of the coupon period. The same distinction holds for other interest rate derivatives, e.g. caps, floors and swaptions.

Notes[edit]