GAT Associates

In November 2016, Gaurav Kapoor, Ashwin Ravichandran and Thomas Kurien from Mumbai had
decided to partner up to start a new business. Welding electrodes sales and distribution was the first
on their radar. While looking for probable companies, they decided to approach ESAC Alloys Limited,
which was headquartered in Mumbai itself. The Zonal Manager of that region had agreed for a new
stockistship to be given to them and laid out the company’s terms and conditions.

1. Equal share of capital from all the partners was expected.

2. Initial inventory worth of Rs.20 lakh was to be bought
3. At least the stock which was sold for two months had to be replenished for the same period.
More purchases from the company was welcome.
4. Employees in the office had to be given one month of bonus at least once in a year,
irrespective of their performance.
5. ESAC Alloys Limited was not liable for any expenses incurred in the sales and distribution of
the welding electrodes.
6. Complete cooperation with the company engineer Mr. Nikhil was solicited for the smooth
functioning of the business.
7. An initial target of Rs.50 lakh was set, after considering the prospective customer sales
happening in the region already.
8. The Balance sheet, Statement of Profit and Loss, and the Cash Flow Statement had to be
submitted to the company at the end of each fiscal without fail.

Having agreed to the terms and conditions, they decided to start the business from April 2017 after
getting all the capital and loan details ready, by naming the entity GAT Associates, with the name
coming from the first letter of each of their names. They also had started searching for a proper office
cum warehouse from where they would operate. There was a need for at least four people – two
office accountants for billing and accounting purpose, one delivery boy and one marketing person to
take care of the marketing work. After searching, they found out the personnel and a salary of Rs.8000
per month for the accountants, Rs. 10000 per month for the marketing person and Rs.9000 per month
for the delivery boy was agreed upon.

For the initial working capital, they all agreed to pool in Rs. 15 lakh each and a loan of Rs.12 lakh @
10% rate of interest annually was taken from the nearby bank.

For the office and godown, they agreed terms to buy an old office space in an apartment that was
worth Rs.25 lakh. There were a few unused items and furniture that were sold for a meagre Rs.10000
and the renovation work had cost them Rs.1 lakh. The building would be depreciated uniformly over
20 years with no salvage value.

For operations, a computer with printer for Rs.50000, three bikes, totalling to Rs.1.5 lakhs with an
insurance of Rs.9000 for three years, three mobiles worth Rs.7000 each with an advance rental paid
for Rs.7200 and a packing machine worth Rs.20000 were bought. Further, Mr.Nikhil suggested to buy
some stationery worth Rs.20000, which was bought in January 2017.

The bikes attracted yearly road taxes of Rs.2000 per bike and the building an annual property tax of
RS.10000.
The depreciation details for the assets bought for the operations are as follows.

S.No. Asset Worth Depreciation Lifetime(years) Salvage Value

Method
Sum of the Year
1 Furniture 40000 5 -
Digits
Mobile
2 21000 SLM 2 1000
phones
3 Bikes 150000 SLM 15 30000
Computer
4 50000 SLM 5 2000
and printer
Packing Sum of the Year
5 20000 10 -
machine Digits

The operations started on April 1, 2017 as planned earlier. During the entire course of the first year,
there were a lot of ups and downs in the business. As it was only the first year, the partners were
positive about the growth of business. A few important incidents are as follows.

 One of the bikes got into an accident in the month of June and the cash expenses for that
repair had cost Rs.16000.
 The parking in the apartment was not functional, so they had to rent a parking space from the
neighbouring apartment for Rs.800 per vehicle per month.
 At the end of the year, a salary balance of Rs.40000 was left unpaid, while everything else
was settled in cash.
 The bonus discussed earlier was planned to be given out as Diwali bonus, but had not been
given till the end of that financial year.
 The stationery bought at the beginning was completely exhausted.
 On Sundays, when the office was closed, Ashwin was smart enough to rent the bikes to the
kids from the nearby apartments and this added Rs.20000 for the year.
 The petrol expenses had cost a whopping Rs.25000 on the whole, owing to the high pricing by
the inefficient government.
 The internal purchases and sales were reviewed once in two months. They operated in both
cash and credit basis, with most of the Those details are as follows:
 Two month period Sales(Lakh Rupees) Purchases(Lakh Rupees)
1 1.2 0.9
2 1.5 1.1
3 2.8 2.0
4 6.3 5.5
5 4.7 4.1
6 7.2 6.6

Out of these, the total credit sales amounted to Rs.5.6 lakh and total credit purchase to Rs.9.1 lakh.
Rest everything was done in cash. At the end of the year, all the credit transactions weren’t done with
the payments. The income tax calculated on the profit was yet to be paid.

At the end of their first year of business, GAT Associates submitted the following documents to ESAC
Alloys Limited for auditing purposes.

Balance sheet for the year ending March 31, 2017

Assets Liabilities and Equities

Building 2595000 Capital 4500000

Computer 50000 Loan 1200000
Bikes 150000
Packing machine 20000
Mobile phone 21000
Prepaid insurance 9000
Inventory 2000000
Prepaid mobile rental 7200
Stationery 20000
Furniture 40000
Cash in hand 787800

Total Liabilities and

Total Assets 5700000 5700000
Equities
 Statement of Profit and Loss for the
year ending March 31, 2018
Type Amount
Revenue from cash 2964000
Revenue from credit 560000
Revenue from bike rental 20000
Total Revenue 3544000

Petrol expenses 25000

Parking rent 24000
Salary expense 420000
Bonus expense 35000
purchase in cash 1110000
Purchase in credit 910000
Bike maintenance 16000
insurance expense 3000
Stationery expense 20000
Depreciation 178286
Interest expense 240000
Property tax 10000
Road tax 6000
Total Expenses 2972286

EBIT 571714
Income tax @ 35% 200099.9
Profit after tax 371614.1

Depreciation expense
incurred
Type Amount
Building 129750
Bike 12000
Computer 9600
Packing machine 3636
Mobile phone 10000
Furniture 13300
 Cash Flow Statement for the year ending March
31, 2018
Opening cash balance 787800 Salary paid 380000
Revenue 2964000 Petrol expenses 25000
Revenue from bike rental 20000 Bike maintenance 16000
Parking rental 24000
Interest paid 240000
Property tax 10000
Road tax 6000
Purchase 1110000
Closing balance 1811000
3771800 3771800

Balance sheet for the year ending March 31, 2018

Assets Liabilities and Equities
Building 2465250 Capital 4500000
Inventory 2110000 Loan 1200000
bike 138000 Retained earning 371614.1
computer 40400
Account receivable 560000 Income tax payable 200099.9
Prepaid insurance 6000 Salary payable 40000
packing machine 16364 Bonus payable 35000
mobile phone 11000 Account payable 910000
furniture 26700
cash in hand 1960800
Total Liabilites and
Total Assets 7256714 Equities 7256714