Human Resource Accounting (HRA)

What is Human Resource Accounting?

Human Resource Accounting is about identifying and measuring data of human resources. It is used to develop a financial assessment of people in the organization during a particular time period. It is also about evaluating the economic result of investment in people.

The purpose of Human Resource Accounting is to:

1. It allows the management to effectively monitor the use of HR in the organization.
   
   
2. It controls the appreciation, depletion or conservation of HR.
   
   
3. It furnishes the cost and value information for making management decision regarding acquiring, allocating, developing, and maintaining HR.

Human Resource Accounting Definition

Objectives of Human Resource Accounting

Some of the objectives of human resource accounting should fulfil include:

1. Produce information of cost and value of Human Resource
2. Effectively monitor the use of Human Resource
3. Appreciation and Depreciation of Human Resource
4. Provide the cost and value information

Produce information of cost and value of Human Resource

The main aim of HR Accounting is to generate cost and value information of human resources by measuring and identifying the data about the employees or managers working in an organization.

Effectively monitor the use of Human Resource

Human Resource Accounting helps the organization to make the best employment of human resources and keep a constant check on the performance of human resources. It ensures that whatever cost management has incurred in acquiring, selecting or training the employees is justified.

Appreciation and Depreciation of Human Resource

HRA is also considered as an accounting system that treats employees as the biggest asset of the organization. Their level of performance and quality of work is recorded in the books of an organization.

Provide the cost and value information

Human Resource Accounting as it is clear from its meaning is an activity of knowing cost invested in employees towards their recruitment, training, payment of wages and salaries and other benefits paid in return of their contribution towards the organization. This cost and value analysis is very useful for the organization

Advantages of Human Resource Accounting

Advantages of human resource accounting are mentioned below:

1. Helps in decision making
2. Identifies the strength and weakness of the existing workforce
3. Measures the effectiveness of the HR policies
4. Helps investors judge a company
5. Measures the return in investment

Helps in decision making

Human Resource Accounting helps in taking appropriate decisions regarding human assets in the organization.

1. Whether to recruit a new employee or to promote the employee internally?
   
   
2. Whether to transfer the employees to a new location or hire employees locally?
   
   
3. Whether to incur additional costs in training the existing employees or hire consultants from outside?

Identifies the strength and weakness of the existing workforce

Human Resource Accounting helps in identifying the strength and weakness of the existing manpower in the organization. This will help the management in taking decision regarding

1. Manpower planning
2. Training and development
3. Transfers
4. Promotions
5. Retrenchment of the employees

Measures the effectiveness of the HR policies

Implementation of Human Resource Accounting system enables the management to assess the effectiveness of its HR policies. If the management is incurring high cost on the recruitment of employees, it can change the method of recruitment.

Helps investors judge a company

The cost and value information provided by different organizations by the way of Human Resource Accounting will help the investors to identify the right company for the purpose of their investment.

Measures the return in investment

Human Resource data also helps in the measurement of ROI. The organization makes investment on its employees with the expectations of generating returns. It should make sure that the company’s return on investment on its Human Resources should be greater than the investment in them in terms of recruitment, training and development etc.

Methods of Human Resource Accounting

Several methods have been in use but they all fall under methods of human resource accounting:

1. Historical Cost Method
2. Replacement Cost Method
3. Present Value Method and Economic Value Method
4. Asset Multiplier Method

Key Takeaway

Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.

Reference

1. E.G. Flamholtz, ” Human Resource Accounting”, Dickenson Publishing, Calif,1974.
2. J. E. Spiring, Selling HRIS to Top Management’s”, Personnel, Oct 1998.
3. Human Resource Accounting, “Interests and Conflict,’’ CEDEFOP.

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