An arrears balance shows an accumulation of bills you owe on a balance sheet. Whether you accidentally missed a payment or don’t have the cash flow to make a payment, an arrears balance represents the sum of all past due invoices or debts that you should’ve paid earlier and still owe. The arrears balance doesn’t include any invoices you owe that haven’t yet come due.
How the Arrears Balance Works
If you have fail to pay a $100 bill in each of the past three months because of cash flow difficulties, your arrears account balance comes to $300. If you have another past-due bill that comes to $50 per month over the past two months, you add that $100 to the $300 you already owe. Now, your arrears balance comes to $400. The arrears balance doesn’t just show one past-due bill, it shows all of them added together.
How to Find the Arrears Balance on a Financial Statement
When you look for an arrears balance, you usually find it in your company’s dividend account, because some businesses agree to pay all their shareholders a dividend. In reality, you’re not legally required to make a cash payment. Instead, you can delay dividends payments until you have the cash. As a result, many companies have a growing accumulated dividends payable balance because, by Canadian law, they must pay that balance eventually.
Consequences of an Account in Arrears
In general, having an arrears balance or arrears account isn’t good for your company’s financial health. A vendor may refuse to do business with you if you have a piled-up arrears balance. Alternatively, a financial institution may place a hold on your assets if you don’t have the ability to pay your bills. An arrears balance typically arises when you agree to make payments on a fixed schedule, such as your monthly rent on your office building, a recurring utility bill or fixed insurance charges. If you pay off your arrears quickly, you can minimize any bad feelings or damage to your company’s reputation.
Tracking expenses and income offers one great way to keep your arrears account from getting out of hand or populating at all. More than 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.