Definition of Arrears
In accounting, the term arrears will be used in the following situations:
- If a corporation does not declare and pay the dividend on its cumulative preferred stock, the corporation must disclose in its notes to the financial statements that it has dividends in arrears. Dividends in arrears (and their current dividend) must be paid to the preferred stockholders before the common stockholders can be paid a dividend.
- When an annuity consists of a stream of equal amounts occurring at the end of equal time intervals, it is known as an ordinary annuity or an annuity in arrears.
Example of Arrears
Assume a corporation has 10,000 shares of 6% $100 cumulative preferred stock. Since the corporation has a limited amount of cash available, the board of directors did not declare any dividends on the preferred stock this year. In other words, the corporation has dividends in arrears of $60,000 (6% X $100 X 10,000). The preferred stock’s dividends in arrears must be disclosed in the corporation’s notes to its financial statements. This notifies investors and others that these past, omitted dividends must be paid before any dividends can be declared and paid.
Typically, the monthly payments required for automobile and real estate loans are annuities in arrears. For example, if a company borrows $50,000 on September 30, the first of the monthly payments will be due on October 31, the second payment will be due on November 30, and so on.
