In accounting we use the word arrears in at least two ways. One use involves the omitted dividends on cumulative preferred stock. For example, if a corporation has cumulative preferred stock and due to a shortage of cash decides to omit the dividend on those preferred shares, the preferred dividend is in arrears. The result of having these dividends in arrears is that the owners of the common stock cannot receive a dividend until the preferred stock's dividends in arrears are paid and the preferred stock's current year dividend is also paid. Having dividends in arrears also requires a disclosure in the notes to the financial statements.

Arrears is also used in the context of annuities. When an annuity's equal payments occur at the end of each period, the annuity is said to be an annuity in arrears or an ordinary annuity.

Arrears is also used to simply mean past due, or behind in payments.

View Our Course Outline