Challenge Zone: Theory Base of Accounting
Each challenge solved = +25 XP. Solve without a hint = +10 bonus XP. Solve all four to earn the chapter’s Topper badge.
- Apply the cost concept to a tricky asset purchase with GST
- Combine revenue recognition, matching and conservatism to find the true profit
- Measure the effect of breaking the consistency concept
- Trace GST and input tax credit through a supply chain across states
Ready for the topper round? These questions mix several concepts at once, just like the case-based questions in the board exam. Do not rush: read each line, ask "which concept applies here?", and only then calculate. Hints are there if you get stuck, but try on your own first. If you crack all four, you understand this chapter better than most students!
🌍 Where is this used in real life?
Every company's annual report has a section called "Significant Accounting Policies". It states that the accounts are prepared on the accrual basis under the historical cost convention, as a going concern, following Ind AS or AS. When a Chartered Accountant audits a company, one standard check is whether the business really is a going concern; if serious doubt exists, the auditor must report it. Shopkeepers meet this chapter every month in GST: software like Tally automatically charges CGST + SGST or IGST depending on the place of supply, and in their GST returns (such as GSTR-1 and GSTR-3B) businesses claim input tax credit so that tax is paid only on the value they add.
🪄 Accounting magic
Cash basis and accrual basis often give different profits for a year, yet over the whole life of a business, once every customer has paid and every bill is settled, both methods add up to the same total profit. They never disagree on how much was earned; they only disagree on which year it belongs to. That is exactly why accountants prefer accrual: the question users ask is "how did we do this year?"
⭐ Challenge 1 (Level: Tough)
On 1 April 2026, Sharma Traders buys a packing machine. List price ₹5,00,000; GST at 18% ₹90,000 (the business is registered and gets full input tax credit); freight ₹12,000; installation ₹18,000; trial-run materials used to test the machine ₹5,000; first year's insurance paid after the machine started working ₹6,000. At what amount will the machine be recorded (in ₹)?
GST ₹90,000 is excluded because it is recovered as input tax credit. Insurance ₹6,000 is an expense of the year, incurred after the machine was ready for use.
⭐⭐ Challenge 2 (Level: Tougher)
Kapoor Gift House, FY 2026-27: cash sales ₹4,20,000; credit sales ₹1,80,000; an order of ₹30,000 received on 28 March 2027 (goods to be delivered in April) with an advance of ₹15,000; purchases ₹4,50,000; closing stock at cost ₹90,000, market value ₹75,000; rent paid ₹78,000 covering 13 months at ₹6,000 per month (includes April 2027); salaries paid ₹55,000 and ₹5,000 still outstanding; a customer has sued the shop and a loss of ₹10,000 in damages is likely. Find the net profit (in ₹) following all accounting concepts.
Cost of goods sold = 4,50,000 − 75,000 = 3,75,000 (matching + conservatism).
Rent = 12 × 6,000 = 72,000; Salaries = 55,000 + 5,000 = 60,000 (matching).
Provision for damages = 10,000 (conservatism).
Net profit = 6,00,000 − 3,75,000 − 72,000 − 60,000 − 10,000 = ₹83,000
⭐⭐ Challenge 3 (Level: Tougher)
A shop bought a machine for ₹4,00,000 on 1 April 2025 and charged depreciation at 10% per year on cost (straight line) in FY 2025-26. In FY 2026-27, without any real change in the machine's use, the owner switched to 20% per year on the book value (written down value). By how much is the FY 2026-27 profit reduced only because of this change (in ₹)?
New method: 20% of 3,60,000 = 72,000.
Reduction in profit = 72,000 − 40,000 = ₹32,000. Under the consistency concept this change and its effect must be disclosed; otherwise users would wrongly think performance fell.
⭐⭐⭐ Challenge 4 (Level: Topper)
GST rate is 18% throughout. A manufacturer in Lucknow (UP) sells goods to a dealer in Kanpur (UP) for ₹50,000. The dealer sells them to a retailer in Delhi for ₹70,000. The retailer sells them to a consumer in Delhi for ₹1,00,000. Everyone claims full input tax credit. How much GST must the Delhi retailer pay to the government after setting off input tax credit (in ₹)?
Stage 2 (UP → Delhi, inter-state): IGST 18% of 70,000 = 12,600. Dealer pays 12,600 − 9,000 = 3,600.
Stage 3 (Delhi → Delhi, intra-state): CGST 9,000 + SGST 9,000 = 18,000. Retailer's input credit = IGST 12,600.
Retailer pays 18,000 − 12,600 = ₹5,400.
Check: 9,000 + 3,600 + 5,400 = 18,000 = 18% of the final price ₹1,00,000, borne by the consumer. Each stage paid tax only on its own value addition.
🧠 Think fast
- ₹12,000
- ₹4,000
- ₹8,000
- Nil
- Creating a provision for doubtful debts
- Valuing stock at the lower of cost and market value
- Recording an expected rise in the value of land as profit
- Writing off goodwill from the books
📌 What toppers remember
- Cost of an asset includes everything needed to make it ready for use (freight, installation, trial run) but not recoverable GST or later running expenses.
- True profit needs several concepts together: revenue recognition (orders and advances excluded), matching (12 months' expenses, outstanding included), conservatism (stock at lower value, likely losses provided).
- Changing an accounting method changes profit without any real change in performance, so consistency requires disclosure of such changes.
- In a GST chain each seller pays only on the value added; total GST equals the tax on the final price, borne by the consumer.
- Cash and accrual bases differ only in timing; over the whole life of a business they give the same total profit.