Human Resource Accounting (HRA)

What is Human Resource Accounting?

Human Resource Accounting can be defined as the process of identifying, quantifying, and reporting the overall cost incurred in the recruitment, induction, training, and development of the human resources i.e. employees and their economic value to the organization at present. It is also termed Human Capital Accounting.

Simply put, Human Resource Accounting measures the effectiveness of personnel working in the organization and its utilization in the best possible manner.

HRA is basically the art of systematically valuing, recording, and reporting the human resources in the company’s books of accounts. It is a tool of management that helps in analyzing the quantum and quality so as to achieve an equilibrium point between the human resources required by the organization and the human resources provided to the organization.

Human Resource Accounting makes an attempt to assess the cost and value of the manpower working in the organization. It facilitates efficient and effective management of the firm’s human resources by providing relevant information about the acquisition, development, evaluation, and rewarding of the employees of the company.

Objectives of Human Resource Accounting

  • To enable management personnel to monitor the optimum utilization of human resources of the organization.
  • To provide information for ascertaining the position of the company’s human assets. in essence, it checks the increase or decrease in the value of human resources.
  • To furnish information relating to cost-value for managerial decisions, with regard to the acquisition, development, allocation, and maintenance of human resources to achieve organizational objectives.
  • To ensure the development of effective human resource management practices by classifying the financial consequences of different practices.
  • To consider people as an asset and investment and not an expense.
  • To conduct analysis of the human assets, to identify whether they are appreciating, depreciating, or conserving.
  • To assist the organization in decision making in various matters like Direct Recruitment, Promotion, Transfer or Retention, Retrenchment, etc.

Need for Human Resource Accounting

Financial Accounting only displays a company’s financial affairs, with the help of its Balance Sheet and Income Statement. So, it does not reflect a complete picture of the company’s affairs as all the resources and assets are not completely shown.

In addition, a huge amount is invested in the hiring, training, and acquiring qualified, competent and experienced manpower by the companies these days. Therefore, it is important to show the true position of the company, considering the human element.

Furthermore, management has to take important decisions regarding human resources for effectively running the organization. The decisions may be related to appointment, promotion, training, internal transfer, job evaluation, performance evaluation, lay off, add-on benefits, etc. And so, if there is no data regarding human resources, the decision-making would be difficult.

Also, the employee has complete information about the expenditure made by the employer on polishing and furthering the skills and knowledge, as well as his actual value in the organization. So, he/she will work accordingly.

It is to be noted that, strikes, lockouts, high labor turnover, are always present in industries where human resources are not properly valued. That s why there is a need for human resource accounting.

Advantages of Human Resource Accounting

The advantages of human resource accounting are discussed hereunder:

  1. Human Resource Accounting furnishes useful information regarding the worth of human capital which facilitates managers in taking the right decisions with respect to various human resource activities like recruitment, promotion, transfer, retrenchment, and retention.
  2. It emphasizes the strengths and weaknesses of the company’s existing workforce, which helps in human resource planning.
  3. It serves as a device to determine the effectiveness of the company’s human resource policies. Also, it gauges whether the return on investment is adequate or not.
  4. The report produced by the human resource accounting helps in improving the motivation and morale of the employees. As well as it improves their performance, productivity, and bargaining power. It helps the employees in understanding their worth and contribution towards the achievement of the organization’s goal
  5. It acts as a basis for the planning of physical assets with respect to human assets.
  6. It determines the expenditure incurred in furthering the education and training of the employees, in terms of the benefits generated out of it.
  7. Ascertains the reasons for high labor turnover, at different levels and take appropriate measures for its prevention.
  8. Identifies the main causes of low return on investment such as underutilization of capacity of both physical and human resources.
  9. Understanding and analyzing the inner strength of the concern and facilitates driving the company wisely when the conditions are not favorable.
  10. Provides relevant information to the investors about the real strength of the company, who are interested in making long-term investments.

Limitations of Human Resource Accounting

Valuation of Human Resources is difficult: As there is no predetermined standard for measuring the value of human resources. Unlike financial accounting in which there are principles and standards which help in the measurement of cost and value of the monetary and physical resources of the organization.

And because of this problem, each organization follows its own model of valuing human resources. So, a comparison between the human capital of the two organizations cannot be made.

Impractical measurement exercise: Human Resource Accounting is based on the premise that the employees will remain in the organization for a definite period, which is not true in the present scenario because people switch their job as and when they find better opportunities in some other organization. Hence, it is quite an unrealistic exercise.

Likelihood of critical human problems: It may lead to dehumanization and manipulation in employees. An employee with lower value may become demoralized and disinterested in the work, and the impact will be seen in his/her productivity, competency, and performance.

Opposition from Trade Unions: Trade Unions do not usually support human resource accounting, as it creates differentiation in employees. And if they support it, they demand reward or compensation based on their valuation which may not be affordable to the organization.

Wrap Up

Human Resource Accounting (HRA) present human resources as the capital of the organization and not as expenses. That is to say, it shows the investment made by the organization in its workforce. It indicates the change in their value over a period of time. It is meant to generate data about a company’s human resources, assign value to them and present them as assets of the organization.

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