Double counting
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Double counting is an error that relies on counting more than once one transaction in any possible case. As an effect we get overestimation of anything we wanted to measure. It is very common in accounting, as example of the situation we can imagine that there is a need to include, to computation of domestic gross product, intermediate products costs that were used to create a final product (Fu et al., 2011).
It also can appear in social accounting and then it make reference to a problem in social accounting practice that is conceptual. Approximately it happens while estimating a process in which when Gross Output need to add some new value or entire investment value need to be added (Dechow et al., 2011).
Methods of avoiding double counting
To avoid double counting we need to avoid overestimating values of domestic products so the main focus need to be exactly on the right prices that are adequate for the quantities, and nothing can be over-counted. To avoid such thing people being responsible for estimating values of products usually count it more than once, or even more than twice (Drury, 2013).
There are two methods that can help with this error:
- Final Output method in which considered value is only final services and goods value is evaluated not any intermediates products.
- Value added method this method suggests to estimate every stage of production after adding any value to it and after it (Kieso, Weygandt & Warfield, 2019).
Methods of avoiding double counting on the scale of the ecosystem (Fu et al., 2011):
- The first step is to disentangle all the interrelations in the ecosystem and establishing the clear plan of ecosystem service valuation.
- The other factor to consider is the fact that different methods are dependent of each other and cannot be treated without the context of the research.
- The crucial step is to establish consistent system of rating ecosystem services. This effectively avoids the problem of double counting.
Examples of Double counting
- In accounting, double counting can occur when a company counts the same transaction twice. For example, a company may record the same sale of goods in both its accounts receivable and accounts payable ledgers.
- In the insurance industry, double counting can occur when the same loss is reported to two or more insurance companies.
- In economic analysis, double counting can occur when the same economic activity is counted twice in the GDP. For example, if the cost of raw materials is included in the calculation of GDP, but the cost of the finished product is also included, then the cost of the raw materials is counted twice.
- In business, double counting can occur when the same expense is recorded in two different expense accounts. For example, if a company pays for office supplies and records the expense in both the "office supplies" and "miscellaneous" expense accounts, then the expense is counted twice.
Advantages of Double counting
One possible advantage of double counting is that it can provide a more accurate representation of a company's financial position. This is particularly true when it comes to tracking the value of assets and liabilities. By double-counting certain transactions, it can help to ensure that all transactions are accounted for and that the final numbers accurately reflect the total value of the company's financials. Additionally, double counting can help to prevent errors in financial reporting, as it can catch any discrepancies that could otherwise go unnoticed. Finally, double counting may also help to reduce the amount of time it takes to complete the accounting process, as it can help to speed up the process of tracking the value of assets and liabilities.
Limitations of Double counting
Double counting can lead to inaccurate and misleading results. There are several limitations associated with double counting:
- Inaccurate data: Double counting can lead to inaccurate data, as the same transaction is counted multiple times and thus skews the final result.
- Misleading results: Double counting can lead to misleading results as it can hide true trends and patterns in the data.
- Over-estimation: Double counting can lead to an over-estimation of any figures as the same transaction is counted multiple times.
- Inefficient use of resources: Double counting can lead to an inefficient use of resources, as it is time-consuming to check each transaction to ensure that it has not been counted multiple times.
- Legal implications: Double counting can lead to legal implications if it is not corrected, as it can lead to inaccurate financial statements.
In addition to the aforementioned double counting, there are several other approaches that can be employed to avoid such an error. These include:
- Activity-based costing (ABC) which is a methodology used to identify and assign costs to activities that are the cause of the incurrence of costs. This approach helps to ensure that costs are accurately assigned and that double counting is avoided.
- Process mapping which is a technique used to identify the key steps in a process and their associated costs. This helps to ensure that activities are not counted more than once.
- Time tracking which is a method of tracking the amount of time spent on specific activities. This can help to identify and eliminate activities that are not necessary and therefore avoid double counting.
In conclusion, double counting can be avoided by utilizing different approaches such as activity-based costing, process mapping, and time tracking. These techniques help to ensure that costs are accurately assigned and that activities are not counted more than once.
References
- Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements, "Contemporary accounting research", 28(1), 17-82.
- Drury, C. M. (2013). Management and cost accounting, Springer.
- El Serafy, S. (1998). Pricing the invaluable: the value of the world’s ecosystem services and natural capital, "Ecological Economics", 25(1), 25-27.
- Fu, B. J., Su, C. H., Wei, Y. P., Willett, I. R., Lü, Y. H., & Liu, G. H. (2011). Double counting in ecosystem services valuation: causes and countermeasures, "Ecological research", 26(1), 1-14.
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting, John Wiley & Sons.
- Koopman, R., Wang, Z., & Wei, S. J. (2014). Tracing value-added and double counting in gross exports, "American Economic Review", 104(2), 459-94.
- Scott, W. R. (1997). Financial accounting theory, Upper Saddle River, NJ: Prentice Hall (Vol. 343).
- Turner, R. K., Adger, W. N., & Brouwer, R. (1998). Ecosystem services value, research needs, and policy relevance: a commentary, "Ecological Economics", 25(1), 61-65.
Author: Mateusz Fudala
