A genuine related-party loan avoids the loan label because the accounting classification of an inter-company balance is driven by whatever document, if any, created it — and when money moves between related entities informally, through a running current account rather than a signed loan agreement with interest and repayment terms, there's no document forcing anyone to stop and ask "is this a loan?" It just gets booked as "amount due from/to related party" and stays there, functioning exactly like a loan without ever being tested against the accounting or disclosure definition of one.
The usual path a related-party loan takes to avoid the label
- A parent or group company transfers funds to a subsidiary or associate to cover a cash shortfall, booked as an inter-company receivable rather than a loan.
- A director or promoter routes personal funds through a company current account instead of a formal unsecured loan, so it nets against other transactions over time.
- Funds move between common-control entities under a running account with no fixed term, no interest rate, and no repayment schedule — none of the features that would normally prompt a "loan" classification.
- An advance against future services or goods is left outstanding well past any reasonable delivery timeline, quietly becoming loan-like in substance while staying an "advance" in the ledger.
Checking only accounts literally named "loan" or "loans and advances" misses most of these. The substance test — is this balance long-outstanding, interest-free or below-market, and without a repayment schedule — has to be applied to every related-party current account and advance balance, not just the ones already labeled correctly.
Why the label matters more than the balance
The accounting entry is the same regardless of label — a receivable is a receivable. What changes with the label is whether section 185/186 compliance, related-party disclosure requirements, and CARO's loans clause are even considered for that balance. A loan that's never called a loan is a loan that never gets tested against any of those requirements, which is the actual risk, not the bookkeeping itself.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Related parties & disclosuresThe related-party loan nobody on the client's side called a loanThe ledger called it a "current account with subsidiary." It had been one-directional and growing for two years. That is a loan.
- Related parties & disclosuresIdentifying related parties: the audit starting pointA client declaration is a starting point for the related-party list, not evidence of it. How to build and cross-check the list independently.
- Related parties & disclosuresAuditing loans to directors and connected personsThe riskiest loans to directors are rarely booked as loans. They show up as unsettled expense advances and drifting current-account balances.
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