In this guide · 8 sections
- Open one ledger per related party per nature: loan taken, loan given, remuneration, rent, reimbursement and a current account for anything else. One "Director A/c" that nets all of these hides the figures the accounts and the reports need.
- The split feeds the AS 18 note (no relaxation for small companies), the Schedule III borrowings and loans notes and the 2021 table of loans to promoters, directors, KMPs and related parties, the deposit exemption for director loans in Rule 2(1)(c)(viii), sections 185, 186 and 188 with Form AOC-2, CARO clauses 3(iii), 3(iv), 3(v) and 3(xiii), and Form 3CD clauses 23 and 31.
- A director's account that turns debit during the year can be a loan to a director under section 185. You only see it if the loan and the current account are separate ledgers.
- In Tally, put related party ledgers in sub-groups under the proper group, for example "Loans from Related Parties" under Unsecured Loans. Do not create a primary group called "Related Parties", and leave "Nett Debit/Credit Balances for Reporting" off.
- Keep a related party master next to Tally, built from the directors' Form MBP-1 disclosures (s.184). It records the relationship, the AS 18 and s.2(76) status, the Tally ledgers, approvals and deposit declarations.
Try SignReady: SignReady maps related party sub-groups through their Tally groups and remembers them next year.
Start freeIn many small companies, the director has one ledger in Tally, called by his name, and everything to do with him goes into it: the money he lent, his salary, the rent for his wife's flat that the company uses as an office, the school fees the company paid for his children, the travel bills he paid himself. At year-end it shows one net figure, and every related party disclosure has to be rebuilt from the vouchers. This article covers the books set-up that prevents this: which ledgers to open for each director and relative, where to group them in Tally, and the master list to keep alongside. For who counts as a related party and what the AS 18 note must contain, see the AS 18 related party checklist. Law as at 1 November 2026; figures are illustrative.
The rule: one ledger per party, per nature
Each related party gets a separate ledger for each kind of dealing. Under the ledger naming convention, the name starts with the nature and ends with the person, so the ledgers for one person sort together within each group.
| Nature | Ledger name (example) | Tally group |
|---|---|---|
| Loan taken | Loan from Director – Anil Mehta | Loans from Related Parties (sub-group under Unsecured Loans) |
| Loan taken from a relative | Loan from Relative of Director – Sunita Mehta | Same sub-group |
| Loan or advance given | Loan to Director – Anil Mehta | Loans to Related Parties (sub-group under Loans & Advances (Asset)) |
| Remuneration (expense) | Directors' Remuneration – Anil Mehta | Indirect Expenses (or a "Directors' Remuneration" sub-group) |
| Remuneration payable | Remuneration Payable – Anil Mehta | Related Party Payables (sub-group under Current Liabilities) |
| Rent, commission, purchases (expense) | Rent – Relative of Director – Sunita Mehta | Indirect Expenses |
| Rent payable / party account | Sunita Mehta (rent) | Related Party Payables, or a sub-group under Sundry Creditors if she is a trade supplier |
| Expenses paid by the director for the company | Reimbursement Payable – Anil Mehta | Related Party Payables |
| Anything else (personal expenses paid by the company) | Current Account – Anil Mehta | Loans to Related Parties if debit; review at every month-end |
The current account is the one that needs watching. It should be empty most of the time. A balance there is a question for the Board: is it remuneration, which needs approval and TDS as a perquisite, or a recoverable advance to a director, which is a section 185 question? Either way it is decided and moved, not left to net off against the loan.
What depends on the split
Almost every place where directors and relatives have to be disclosed asks for one of these natures, party by party, with volumes and balances:
| Requirement | What it needs from the ledgers |
|---|---|
| AS 18 note (para 23) | The name of each transacting party, the volume of each type of transaction and the closing balances (para 23). Similar items may be aggregated by type of related party, but a material transaction with one party may not (paras 26 and 27), so the ledgers have to give them party by party. The Companies (Accounting Standards) Rules, 2021 give Small and Medium-sized Companies no relaxation in AS 18. |
| Schedule III, borrowings | "Loans and advances from related parties" as a separate sub-head in long-term and short-term borrowings, and the aggregate of loans guaranteed by directors or others (see the borrowings note) |
| Schedule III, loans and advances | Loans and advances to related parties, with details. Amounts due by directors or other officers, or by firms and private companies in which a director is a partner, director or member, stated separately. Since the 2021 amendment, a table of loans to promoters, directors, KMPs and related parties repayable on demand or without terms, with the percentage to total loans and advances in the nature of loans (see the loans and advances note). |
| Deposit rules, Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 | Money from a director, or from a director's relative in a private company, is not a deposit only if the lender gives a written declaration, when the money is given, that it is not out of borrowed funds. The company discloses the amounts in the Board's report. Form DPT-3 reports, as at 31 March, the money received that is not treated as a deposit. |
| Sections 185 and 186; CARO 3(iii) and 3(iv) | Loans given to directors, their relatives and firms in which they are partners, and to entities in which a director is interested, listed borrower by borrower. Section 185 does not apply to a private company in whose share capital no other body corporate has invested, whose borrowings from banks, financial institutions and bodies corporate are below twice its paid-up capital or ₹50 crore, whichever is lower, and which has no subsisting default on them (G.S.R. 464(E), 5 June 2015). That notification came before section 185 was substituted from 7 May 2018. The ICAI Guidance Note on CARO 2020 (Revised 2022) still lists it, but MCA has not clarified, so record which conditions the company meets. CARO 3(iii)(f) asks for the aggregate of loans to promoters and s.2(76) related parties that are repayable on demand or without terms. |
| Section 188, Form AOC-2 (Rule 8(2), Companies (Accounts) Rules); CARO 3(xiii) | Each contract with a related party (rent, purchases, services, office or place of profit) and whether it is in the ordinary course and at arm's length. The particulars go into Form AOC-2 with the Board's report. |
| CARO 3(v) | Deposits and amounts deemed to be deposits. A director loan with no declaration falls here. |
| Section 197 | Managerial remuneration limits apply to public companies, and the auditor reports on them under s.197(16). Private companies are outside s.197, but the remuneration still goes into the AS 18 note for KMP. |
| Income tax: s.40A(2)(b) and Form 3CD clauses 23 and 31 (Income-tax Act, 1961, for FY 2025-26); s.36(2) and (3) of the Income-tax Act, 2025 from tax year 2026-27 | Payments to directors and their relatives, who are "specified persons", listed party by party for clause 23. Loans and deposits taken or repaid, with the mode of payment, for clause 31 (ss.269SS and 269T). |
None of these asks for a director's net balance.
SignReady maps ledgers through their Tally groups, including the client's own sub-groups. "Loans from Related Parties" under Unsecured Loans goes to borrowings, and the mapping is remembered next year. Ledgers moved since last year to a Tally group that maps elsewhere are listed, so a regrouped director loan does not go unnoticed.
Worked example: one ledger, then six
Mehta Packaging Private Limited, FY 2025-26. Anil Mehta is the managing director. His wife Sunita owns the office the company rents. Everything was booked to one ledger, "Anil Mehta", grouped under Unsecured Loans:
| "Anil Mehta" — as booked | Dr ₹ | Cr ₹ |
|---|---|---|
| Opening balance (loan given by him in earlier years) | 15,00,000 | |
| Salary credited, 12 × ₹60,000 | 7,20,000 | |
| Office rent credited, 12 × ₹30,000 | 3,60,000 | |
| Travel bills paid by him for the company | 60,000 | |
| Salary paid to him | 7,20,000 | |
| Rent paid to Sunita's bank account | 3,60,000 | |
| Travel bills reimbursed | 60,000 | |
| Children's school fees paid by the company | 2,40,000 | |
| Loan repaid | 9,00,000 | |
| Total / closing balance | 22,80,000 | 26,40,000 → Cr 3,60,000 |
The draft accounts show "Loans from directors ₹3,60,000", and the related party note shows rent paid to Anil. Split into six ledgers, the same entries read differently:
| Ledger | Closing ₹ | What it means |
|---|---|---|
| Loan from Director – Anil Mehta | 6,00,000 Cr | Borrowing from a related party: 15,00,000 less 9,00,000 repaid. Check the declaration under Rule 2(1)(c)(viii) and the Board's report disclosure. |
| Current Account – Anil Mehta | 2,40,000 Dr | Amount due by a director, unless the Board approves it as remuneration. As a recoverable, it raises section 185 (unless the private company exemption applies), the Schedule III "due by directors" line and the 2021 table if no repayment terms were fixed. |
| Remuneration Payable – Anil Mehta | Nil | Expense ₹7,20,000 to the AS 18 note as KMP remuneration |
| Reimbursement Payable – Anil Mehta | Nil | Reimbursement of expenses, not income of the director. ₹60,000 shown as a reimbursement, not as remuneration. |
| Sunita Mehta (rent) | Nil | Rent ₹3,60,000 to a relative: AS 18 against her, s.188 (leasing of property), AOC-2, Form 3CD clause 23 |
| Rent – Relative of Director – Sunita Mehta | 3,60,000 expense | Rent expense in Other expenses |
Check: ₹6,00,000 Cr less ₹2,40,000 Dr = ₹3,60,000 Cr, the old net figure. Nothing changed in total, but the net figure was wrong in all three places that matter. It understated the borrowing by ₹2,40,000. It hid a debit balance with a director, which Schedule III requires to be shown separately as due by directors and possibly a section 185 issue. And it put Sunita's rent against Anil's name. The accounts, and CARO 3(iv) and 3(xiii) where CARO applies, all change because of this one ledger.
Grouping in Tally: sub-groups, not a primary group
TallyPrime has 28 predefined groups, 15 of them primary. Create related party groups as sub-groups of the group whose nature they share (Gateway of Tally > Create > Group, or Alt+G > Create Master > Group):
- Loans from Related Parties, under Unsecured Loans (which sits under Loans (Liability)). A director loan secured by a charge goes under Secured Loans instead.
- Loans to Related Parties, under Loans & Advances (Asset).
- Related Party Payables, under Current Liabilities, for remuneration, reimbursements and rent payable.
- Expense ledgers stay in Indirect Expenses (or Direct Expenses), where their nature belongs. The party's name in the ledger is enough to pick them up.
Two settings to avoid. First, a primary group called "Related Parties": Tally makes you choose one Nature of Group for it (Assets or Liabilities), so loans taken and loans given end up on the same side. Mapping to Schedule III also has to be done by hand, ledger by ledger. Second, the group option "Nett Debit/Credit Balances for Reporting": it shows the net of the group, which is exactly the netting this set-up is meant to prevent. Leave it at No. How these groups then flow to the statements is covered in Tally groups to Schedule III mapping.
Keep a related party master next to Tally
Tally holds the amounts. It does not know that Sunita is Anil's wife, or that Anil is a partner in a firm the company buys from. That goes in a one-sheet master, kept up to date from the documents the company already receives. Under section 184(1), every director discloses his concern or interest in other companies, bodies corporate, firms and other associations at the first Board meeting in which he participates, at the first Board meeting of every financial year, and whenever the disclosure changes (Form MBP-1). Contracts in which directors are interested go into the register under section 189 (Form MBP-4). Relatives are not in MBP-1, so ask each director and KMP for them each April.
| Column | Example |
|---|---|
| Party and relationship | Sunita Mehta — wife of Anil Mehta (MD) |
| Related under AS 18? Under s.2(76)? Promoter? | Yes / Yes / No |
| Source and date | Director's list of relatives, April 2025; MBP-1 at the first Board meeting of FY 2025-26 |
| Tally ledgers | Sunita Mehta (rent); Rent – Relative of Director – Sunita Mehta |
| Approval | Board resolution date; s.188 basis (ordinary course and arm's length, or approval obtained) |
| Deposit declaration (lenders only) | Date of each declaration under Rule 2(1)(c)(viii) |
| Specified person for income tax? | Yes — relative of a director |
The master does double duty. The accountant uses it to decide which ledger a new transaction goes to. The auditor uses it as the starting list under SA 550 and ties every name in it to the Tally ledgers.
The routine: monthly and at year-end
- Every month: look at the Loans to Related Parties and Related Party Payables groups. A current account in debit, or a payable that has grown, gets decided now, not in May.
- Every loan received from a director or relative: file the written declaration on the same date, and book the money only to the "Loan from" ledger. Repayments go to that ledger too, never to the current account. Loans taken or repaid in cash are a section 269SS / 269T question for clause 31 of the tax audit report.
- Every new contract with a related party: add it to the master with the approval and the s.188 basis before the first bill is booked.
- At year-end: export a ledger-wise trial balance and list every ledger with a related party's name, by group. That list becomes the AS 18 note, the AOC-2, the Schedule III lines, the DPT-3 figures and Form 3CD clause 23.
If you are the auditor and the client has one ledger per director, do not rebuild the year. Ask for the ledger with narrations, split the closing balance as in the example, propose the reclassification entries, and raise the debit-balance question with the Board. Then send the structure above to the accountant for April. The AS 18 note, CARO 3(xiii) and the other places that depend on this list are reviewed as in the CARO clauses that are easy to get wrong.
Try SignReady: CARO working paper and a Board's report draft with the AOC-2.
Start freeFrequently asked questions
Should each director have a separate ledger in Tally?
Yes. Each director and each relative should have a separate ledger for each kind of dealing: loan taken, loan given, remuneration, rent, reimbursement and a current account. A single ledger nets these together, and the AS 18 note, Schedule III, the AOC-2 and Form 3CD clause 23 all need them separately.
Under which group should a loan from a director be shown in Tally?
Under a sub-group such as "Loans from Related Parties" created under Unsecured Loans (or Secured Loans if it is secured). In the accounts, it appears under borrowings as loans and advances from related parties.
Is a loan from a director a deposit?
Money received from a director is not a deposit under Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 if the director gives a written declaration, when giving the money, that it is not out of borrowed funds. The amounts are disclosed in the Board's report. In a private company the same applies to a director's relative.
What if a director's account in Tally shows a debit balance?
A debit balance means the director owes the company. If it is not approved remuneration, it may be a loan to a director under section 185. It must be shown separately as due by directors, and it cannot be netted against a loan from the same director.
Should I create a primary group called Related Parties in Tally?
No. A primary group needs one nature, either assets or liabilities, so loans taken and given end up on the same side, and mapping to Schedule III has to be done by hand. Use sub-groups under Unsecured Loans, Loans & Advances (Asset) and Current Liabilities instead.
Sources
- Companies Act, 2013 — sections 184, 185, 186, 188, 189 and 197, and Schedule III, Division I (India Code)
- Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette): shareholding of promoters; loans to promoters, directors, KMPs and related parties
- Companies (Acceptance of Deposits) Rules, 2014 — rule 2(1)(c)(viii) and rule 16 (Form DPT-3), as amended
- Exemptions to private companies — G.S.R. 464(E), 5 June 2015, and G.S.R. 583(E), 13 June 2017
- ICAI — Guidance Note on CARO 2020 (Revised 2022), clauses 3(iii), 3(iv), 3(v) and 3(xiii)
- AS 18 Related Party Disclosures — ICAI
- Income-tax Act, 1961 — section 40A(2)(b); Form 3CD clauses 23 and 31 (FY 2025-26)
- Income-tax Act, 2025 — section 36 (expenses or payments not deductible in certain circumstances)
- Tally Solutions — Ledgers and Groups in TallyPrime
- Tally Solutions — How to Create, Alter and Delete Groups in TallyPrime
Upload the Tally trial balances. SignReady maps the ledgers through their groups, checks opening balances against last year's closing, sends review points to the client as queries, drafts Schedule III statements in editable Excel and drafts the Board's report with the AOC-2. First 3 finalisations free.
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Version history: 26 Oct 2026 — first published.
