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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

1

Furniture

40000

2

Mobile phones

21000

SLM

2

1000

3

Bikes

150000

SLM

15

30000

50000

SLM

5

2000

20000

Sum of the Year 10 Digits

Computer and printer Packing machine

4 5

Depreciation Lifetime(years) Salvage Value Method Sum of the Year 5 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 1 2 3 4 5 6

Sales(Lakh Rupees) 1.2 1.5 2.8 6.3 4.7 7.2

Purchases(Lakh Rupees) 0.9 1.1 2.0 5.5 4.1 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 Computer 50000 Loan 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 Assets

5700000

4500000 1200000

Total Liabilities and 5700000 Equities

Statement of Profit and Loss for the year ending March 31, 2018 Type Revenue from cash Revenue from credit Revenue from bike rental Total Revenue

Amount 2964000 560000 20000 3544000

Petrol expenses Parking rent Salary expense Bonus expense purchase in cash Purchase in credit Bike maintenance insurance expense Stationery expense Depreciation Interest expense Property tax Road tax Total Expenses

25000 24000 420000 35000 1110000 910000 16000 3000 20000 178286 240000 10000 6000 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