Double Counting (accounting) - What Is The Problem?

What Is The Problem?

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 system for grossing and netting the incomes and outlays of all units. Lacking such a system, we would end up double counting incomes and expenditures of interacting units, exaggerating the quantity of value-added or investments.