Double counting (accounting)

Double counting in accounting is an error whereby a transaction is counted more than once, for whatever reason. But in social accounting it also refers to a conceptual problem in social accounting practice, when the attempt is made to estimate the new value added by Gross Output, or the value of total investments.

In the case of a small individual business, it is unlikely that an expenditure of funds, an input or output, or an income from production will be counted twice. If it happens, that's usually just bad accounting (a math error), or else a case of fraud.

But things are more complicated when we aggregate the accounts of many enterprises, households and government agencies ("institutional units" or transactors in social accounting language). Here, a conceptual problem arises.

The basic reason is that the income of one institutional unit is the expenditure of another, and the input of one institutional unit is the output of another.

If therefore we want to measure the total value-added by all institutional units, we need to devise a consistent procedure for grossing and netting the incomes and outlays of all units, within a system of transactors. Lacking such a system, we would end up double counting incomes and expenditures of interacting units, exaggerating the quantity of value-added or investments.

To estimate the annual net output of a country, for example, the cost of goods and services used up is deducted from gross revenue, all flows are valued uniformly, and flows which fall outside the production boundary are excluded.

The system of gross and netting actually used, is ultimately based on a value theory, which specifies what may generally count as:

In other words, we cannot relate, group and aggregate prices in different ways without making some value-based assumptions that enable valid comparisons. Without those value assumptions, the aggregates themselves would be meaningless. Thus, when economists focus on market-prices, value assumptions are always in the back of their mind, even if they are not aware of that, and regard value theory as metaphysical.

Once the principles of the value theory are established, categories and counting units can be exactly and logically defined, as a basis for mathematical operations to aggregate the of incomes and expenditures. All flows can then be allocated to their appropriate category, without counting the same flow several times.

In fact, the value theory applied in national accounts is nowadays strongly influenced by the valuation principles of ordinary business accounts and the prevailing social relations governing economic exchange, often fixed by law. Thus, for example, it is argued that no new value can result from a unilateral transfer of funds, i.e. where funds are provided without anything being provided in return.

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Wikipedia