Double counting is an error made in a company’s financial information. This occurs when accountants or other employees record information twice in the general ledger. Problems that involve double counting often occur with counting inventory, entering invoices twice, adding numbers twice, or similar actions. The value theory comes into play with these accounting errors, meaning that most of these problems can result in extra value added, decreased values, or transferred value. Fortunately, these types of accounting errors are typically easy to correct.
Increasing value added from double counting occurs when accountants record inventory amounts twice. This adds value because the company will report higher inventory on the balance sheet, increasing current assets. Higher current assets can artificially lower financial ratios that determine how the company uses debt to pay for inventory. The inventory turnover ratios will also report false information. Turnover will be lower as more inventories are reported than are really in the company’s facilities.
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Companies can also create false value added by reporting sales twice in the general ledger. Double counting sales is also a common fraud tool to inflate sales. This allows the company to increase its reported net profit, making the company look better financially. Many companies have several internal controls to protect against double counting in sales so no questions remain as to the validity of reported sales figures. Audits are usually the primary tool for affirming the validity of financial figures.
Decreased values with double counting occur when accountants enter outflow information twice into the general ledger. Recording inventory adjustments, sales returns or discounts, employee wages, vendor invoices, or similar information twice can result in lower reported value. This makes the company look worse off financially. In some cases, the value decreased will also result in higher cash outflows if the company pays wages or vendor invoices twice. Major errors may result in significant disclosures on financial statements or restatements or previously released financial information.
Transferred value can occur as part of the double counting process. When a company allows errors to result in higher cash outflows, as mentioned previously, the company will transfer its value to other firms. This results in lower firm value and possibly the inability to correct these problems. For example, if the company cannot retrieve the extra payments to a vendor, this value then becomes lost. This results in permanent transferred value. Companies may need to report this information separately when preparing financial statements for stakeholders.