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:
- It allows the management to effectively monitor the use of HR in the organization.
- It controls the appreciation, depletion or conservation of HR.
- It furnishes the cost and value information for making management decision regarding acquiring, allocating, developing, and maintaining HR.
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Human Resource Accounting Definition
Flamhoitz defines HRA as “Accounting for people as an organisational resource. It involves measuring the costs incurred by organisations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organisation.“
American Association of Accountants (AAA) defines as “HRA is a process of identifying and measuring data about human resources and communicating this information to interested parties.“
According to Stephen Knauf, “The measurement and quantification of human organisational inputs such as recruiting experience and commitment.”
Objectives of Human Resource Accounting
Some of the objectives of human resource accounting should fulfil include:
- Produce information of cost and value of Human Resource
- Effectively monitor the use of Human Resource
- Appreciation and Depreciation of Human Resource
- 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:
- Helps in decision making
- Identifies the strength and weakness of the existing workforce
- Measures the effectiveness of the HR policies
- Helps investors judge a company
- Measures the return in investment
Helps in decision making
Human Resource Accounting helps in taking appropriate decisions regarding human assets in the organization.
- Whether to recruit a new employee or to promote the employee internally?
- Whether to transfer the employees to a new location or hire employees locally?
- 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
- Manpower planning
- Training and development
- Transfers
- Promotions
- 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.
Limitations of Human Resource Accounting
HRA is yet to gain momentum in India due to certain difficulties:
- The valuation methods have certain disadvantages as well as advantages; therefore, there is always a bone of contention among the firms that which method is an ideal one.
- There are no standardized procedures developed so far. So, firms are providing only as additional information.
- Under conventional accounting, certain standards are accepted commonly, which is not possible under this method.
- All the methods of accounting for human assets are based on certain assumptions, which can go wrong at any time. For example, it is assumed that all workers continue to work with the same organization till retirement, which is far from possible.
- It is believed that human resources do not suffer depreciation, and in fact they always appreciate, which can also prove otherwise in certain firms.
- The lifespan of human resources cannot be estimated. So, the valuation seems to be unrealistic.
Methods of Human Resource Accounting
Several methods have been in use but they all fall under methods of human resource accounting:
- Historical Cost Method
- Replacement Cost Method
- Present Value Method and Economic Value Method
- 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
- E.G. Flamholtz, ” Human Resource Accounting”, Dickenson Publishing, Calif,1974.
- J. E. Spiring, Selling HRIS to Top Management’s”, Personnel, Oct 1998.
- Human Resource Accounting, “Interests and Conflict,’’ CEDEFOP.
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