Have you ever dealt with the terms ‘accounts payable’ or ‘accounts receivable’? if the answer is yes, you might have come across the word ‘paid in arrears’. Although this term sounds complicated, it is quite simpler to understand.
Whenever a payment is provided after a service has been rendered, it is known to be paid in arrears. It can be intentional or unintentional depending on the situation. ‘In arrears’ means payment is behind. For example, in case, you provide a bill after you provided a service, then you will bill in arrears. In case, you pay after a service has been received, you will be paying in arrears. Read on to know more about ‘paid in arrears’.
What does Paid in Arrears mean in Payroll?
Employee payroll is a type of payment that is paid in arrears. Arrears payroll means that you will have to pay an employee for work that has already been done in the previous pay period. This is in contrast to the ‘current pay’ model.
For example, you will pay employees on the seventh of April for work that was already completed during the month of March. Since the employees receive their money after the work has already been completed, it will be known as paid monthly in arrears.
Most businesses prefer setting up a calendar to make the process smoother. When you pay your employees in arrears, you get the time to calculate tips, commissions, and overtime hours. The alternative for the same is to pay ‘in current’ which means that employees get paid for the projected number of hours that they’ll work.
What does Paid in Arrears mean in Accounting?
No matter what is the method of your payment, it is imperative to balance your budget and finances. When you pay for goods or services once they have been received, it is known as paid in arrears. For example, if you buy services from a vendor with 20 payment terms. This implies that you will have to submit the payment until 20 days after receiving the service.
The vendor opts for paid in arrears with the terms included in their contract or invoice. When you pay in arrears, your business gets additional flexibility which further boosts cash flow. When you have more time to pay, you can increase your sales in order to generate cash for payments.
However, in some cases, it can refer to late payments. When your business is behind the bills, this means it is in arrears until the payment is completed.
Why Do Businesses Pay in Arrears?
Most businesses pay in arrears because of the cash flow. Be it operations, taxes, inventory, or payroll, cash flow pays for all. Organizations pay in arrears to secure their financing by taking extra time to boost their revenue by receiving money that they owe or making additional sales.
Paying Employees in Arrears Vs Current Pay Method
The pay periods are set by companies on a recurring schedule that can occur weekly, biweekly, semi-monthly or monthly. The number of working hours are recorded and the payment is made according to that. Now there are two options for payment paying employees in arrears or the current pay method. For example, paying employees in arrears would mean that the payment would be made once the employee has logged all of his or her time. Paying during the current pay period would imply that the employees get paid during their current pay period. For example, an employee might get paid in the morning for hours that he hasn’t even completed until that evening.
Benefits of Paid in Arrears billing
- Accurate payments: One of the most important benefits of paying in arrears is that it reduces the risk of incorrect payments. While billing in advance may raise an issue of refunds in case you overcharge a customer. On the other hand, if you undercharge, you will have to issue multiple bills.
- Easier: Paying employees in arrears is much easier as compared to the current pay method. Also, you get more time to process the payments.
Disadvantages of billing in arrears
- Cash Flow Gets Affected: If you’re billing in arrears, your company won’t receive payments right away, which can affect your cash flow.
- Risk of losing payments: The risk of losing payments increases if you bill in arrears as you won’t receive payment until after you have delivered a good or service This increases the chances of a client failing to pay you because of insufficient money, their forgetfulness, or failure to receive an invoice.
- Chance of falling behind on payments: Balancing your budget becomes difficult if you bill in arrears. In case you are paying too many things in arrears, the chances of falling behind on payments can increase.
Tips for paying in arrears
There are various tips that can help you in the process of paying in arrears:
- Make sure you audit your accounts payable regularly so that you can remain up-to-date.
- It is very important to keep a constant check on organizations that pay you. If you are in touch with a business that is constantly in arrears and throwing red flags, then the chances of you receiving the payment are very less.
- If your client or partner is too far in arrears, then you can consider pausing your business arrangement until the account is current in order to avoid any kind of risk.
How Deskera Can Assist You?
As a business, you must be diligent with employee leave management. Deskera People allows you to conveniently manage leave, attendance, payroll, and other expenses. Generating payslips for your employees is now easy as the platform also digitizes and automates HR processes.
Key Takeaways
- Whenever a payment is provided after a service has been rendered, it is known to be paid in arrears
- Employee payroll is a type of payment that is paid in arrears. Arrears payroll means that you will have to pay an employee for work that has already been done in the previous pay period
- Most businesses pay in arrears because of the cash flow. Be it operations, taxes, inventory, or payroll, cash flow pays for all
- Paying employees in arrears means that the payment would be made once the employee has logged all of his or her time. Paying during the current pay period would imply that the employees get paid during their current pay period
- One of the most important benefits of paying in arrears is that it reduces the risk of incorrect payments
- Paying employees in arrears is much easier as compared to the current pay method. Also, you get more time to process the payments
- Besides advantages, billing in arrears has certain disadvantages as well
- Billing in arrears can affect your cash flow
- The risk of losing payments increases if you bill in arrears as you won’t receive payment until after you have delivered a good or service
- Balancing your budget becomes difficult if you bill in arrears
- There are certain tips that can be followed if you want to smoothen the process of paying in arrears. Audit your accounts payable regularly, and keep a constant check on the organizations that pay you
- If your client or partner is too far in arrears, then you can consider pausing your business arrangement until the account is current in order to avoid any kind of risk
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