If you’ve done some accounting before you’ve likely heard of double counting. Accounting is a meticulous process. You have to enter the right amounts for each expense. Every invoice or cheque has to be dated correctly. And most importantly, you need to make sure there’s no double-counting in your ledgers and balance sheets.
Double counting can happen when you’ve put duplicate entries for inventory items, recorded double wages for the same employee, or paid two identical invoices to the same vendor. These accounting errors can lead you to report inaccurate financial statements. You may even lose money if you can’t recover duplicate payments from a client.
In this article, we explore what double counting is and how you can avoid it in your finances.
What is double counting?
Double counting is an accounting error made when someone records information twice in a general ledger. It can affect different departments of a business, from finance to procurement – essentially any group with the responsibility to handle large amounts of sensitive information.
Problems caused by double-counting can result in a company losing some of its value. In some cases, double counting may give a company added value but with potential consequences, if done fraudulently.
Here are some instances of double counting.
Recording inventory amounts twice
Double counting can occur when inventory amounts are keyed in twice during stocktaking or financial reporting. Doing so may increase the value of a company inadvertently. The company might report a higher inventory on the balance sheet and increase the number of current assets it owns.
In this scenario, the company could have artificially high current assets in its financial statements. The company will likely report low turnover as it falsely reports more inventories than it has.
Reporting sales twice
Companies may also find themselves double-counting sales. This may happen on purpose or by mistake. Sales may be recorded twice on the balance sheet to increase a company’s reported net profit.
An audit will usually uncover a sales record that has been double-counted. Many companies have internal monitoring controls to make sure that double-counted sales do not happen because false sales figures nullify the validity of a sales report.
Paying invoices and employees twice
Double counting can also happen when employee wages or invoices are paid twice. A payroll form for an employee may have been handled by two different HR employees. Or a second, duplicate invoice was sent out by an accountant handling high volumes of invoices and POs.
This can create a tricky situation both within the company and outside of it. Internally, the company will have to reconcile the accidental payments with the employees or vendors. Externally, the financial reports containing the false double payments will make the company look less valued than it is.
If the company cannot retrieve the extra payments, then it loses the value of the transaction.
What effect can double-counting have on your finances?
Double counting, whether done mistakenly or fraudulently, may lead to monetary losses and problems with audit reports. Some severe cases of double counting might even affect the reputation of a business.
Double counting is most likely to happen when accountants are working through a complex ledger or sorting through hundreds of invoices for the same product or service. This can be further compounded if many of the sales records have the same amount of money.
Double counting errors that are not caught can cause a company to lose thousands of dollars. According to a report by SAP Concur, duplicate payment can cost small and medium-sized companies (SMEs) up to $12,000 a month in time lost and reconciliation costs.
Another report by the US Government Accountability Office (GAO) found that 0.05 percent of invoices paid were duplicate payments. The mistaken payments led to a loss of profit and problems with cash flow.
Double-counted sales records and inventory entries may also lead to claims of fraud. If a company is found to be reporting profits when in fact it is accruing losses, it could be investigated for manipulating financial statements.
In the most severe cases, duplicate payments may require expensive recovery audits and intensive manual retrieval processes to find the errors and correct them. According to a 2012 poll by the consultancy group KPMG, duplicate payments happen because 64 percent of firms still rely mainly on manual control processes to track sales and detect errors such as double-counted sales records and invoice errors.
Federal rules on double-counting (FDIC, etc.)
In 2021, the Federal Deposit Insurance Commission eliminated a double-counting rule that would have required companies seeking to conduct mergers and acquisitions (M&As) to include credit risk in both the purchase price and the allowance build.
The original proposal had specified that banks and companies would have to abide by a current expected credit loss (CECL) system. CECL was opposed by several industry leaders over concerns that it would reduce transparency and complicate M&A dealmaking. Any company doing an M&A would have to do the CECL analysis in addition to the economic analysis, further complicating the credit risk for acquired loans.
The final rule now removes double-counting of some CECL transitional amounts for large and complex banks.
Other federal measures against double-counting include a penalty scheme under the False Claims Act that fines any person who submits fraudulent double invoices or exaggerated inventory lists with duplicate entries to a government institution. Under the Federal Civil Penalties Inflation Adjustment Act of 1990, wrongdoers may receive a civil penalty between $5,000 and $10,000.
How do you avoid double counting?
Double counting can be avoided if firms standardize their bookkeeping practices. Most double-counting mistakes occur as a result of human error. With the right documentation and accounting processes, these errors can be limited to a minimum.
Train staff to be meticulous when entering data
Accounting staff and other employees should be trained to double-check every sales record and stock data they create. This will help them see if other staff have already done the work they’re about to do, and prevent duplicating their work.
Consistent reminders from middle managers to enter invoice amounts and part numbers correctly should also be the norm, both in written form and verbally. Managers should point out double-counting errors so employees understand what types of information are most prone to double counting.
Clean up your client contact information
Sometimes double-counting errors appear when a vendor uses multiple addresses or contact information. This can lead to a situation where you accidentally send two to three copies of the same invoice to the same vendor.
It’s best to review your vendor contact information periodically to get rid of the information you don’t need. It may also be good practice to call up the vendor’s contact person to check that the information you have on file is correct.
Install a computer- or web-based accounts payable system to manage your sales data
A good way to prevent double-counted sales records and invoice information is to install an Enterprise Resource Planning (ERP) system that tracks all of your sales data. This system allows you to create one master file record for each vendor or client with a specific code assigned to it. Each record can contain bank details, contact information, and a record of all transactions that can be accessed by anyone on the finance team.
The ERP system can track every transaction made between you and the vendor or client, and alert you to any duplication of documentation.
Assign one person to check for double counting
It may also be a good idea to assign a manager in accounting to review all outgoing sales reports, invoices, and financial statements. A fresh (and independent) pair of eyes can help spot inconsistencies and make sure the double-counting errors are corrected before they are sent out.
The manager may establish one communications channel with each stakeholder to contain the flow of sensitive financial information. He or she can also monitor and limit payment requests from vendors who submit second or third payment requests when they don’t receive the payments on time.
Can you fix it if you’ve already double counted?
Yes, most cases of double counting can be fixed.
If a double-counting error such as a duplicate sales record has been discovered during an internal review, it can be offset. The duplicate bad expense can be corrected with an additional credit amount that removes the effect of the duplicate entry from the ledger. Writing off the expense leaves a paper trail of the double-counting error and provides traceability for auditors.
If you’ve made a double-counting error that is external, such as a double payment to a vendor, then you will need to speak to them as quickly as possible. Duplicate payments can cost thousands of dollars if they are not reconciled. Notify the vendor about the mistake, apologize for the mistake, and kindly ask them to return the double payment. An understanding vendor will most likely return the duplicate payment.
Duplicate invoices can also be handled the same way. Apologize for the mistake and ask the customer to simply void the invoice. Then make note of the error in an internal memo to keep a record of the mistake.
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