Human Resource Accounting

Definition
 Human Resource Accounting is the process of assigning, budgeting, and reporting the cost
of human resources incurred in an organization, including wages and salaries and training
expenses.

Human Resource Accounting is the activity of knowing the cost invested for employees
towards their recruitment, training them, payment of salaries & other benefits paid and in
return knowing their contribution to organisation towards it's profitability.
 The American Accounting Association’s Committee on Human Resource Accounting
(1973) has defined  Human Resource Accounting as “the process of identifying and
measuring data about human resources and communicating this information to interested
parties”. HRA, thus, not only involves measurement of all the costs/ investments associated
with the recruitment, placement, training and development of employees, but also the
quantification of the economic value of the people in an organisation.
 Purpose of HRA in an Organisation

 It furnishes cost/value information for making management decisions about acquiring,

allocating, developing, and maintaining human resources in order to attain cost-
effectiveness.
 It allows management personnel to monitor effectively the use of human resources.
 It provides a sound and effective basis of human asset control, that is, whether the
asset is appreciated, depleted or conserved.
 It helps in the development of management principles by classifying the financial
consequences of various practices
 Objectives Of HRA
 To furnish cost value information for making proper and effective management
decisions about acquiring, allocating, developing and maintaining human resources
in order to achieve cost effective organisational objectives.
 To monitor effectively the use of human resources by the management.
 To have an analysis of the human assets i.e. whether such assets are conserved,
depleted or appreciated.
 To aid in the development of management principles. and proper decision making
for the future by classifying financial consequences of various practices.
 In all, it facilitates valuation of human resources recording the valuation in the books
of account and disclosure of the information in the financial statement.
 It helps the organisation in decision making in the following areas.
 Advantages of HRA
 It checks the corporate plan of the organisation. The corporate plan aiming for expansion,
diversification, changes in technological growth etc. has to be worked out with the
availability of human resources for such placements or key positions. If such manpower is
not likely to be available, HR accounting suggests modification of the entire corporate
plan.
 It offsets uncertainty and change, as it enables the organisation to have the right person
for the right job at the right time and place.
 It provides scope for advancement and development of employees by effective training
and development.
 It helps individual employee to aspire for promotion and better benefits.
 It aims to see that the human involvement in the organisation is not wasted and brings
high returns to the organisation.
 It helps to take steps to improve employee contribution in the form of increased
productivity.
 It provides different methods of testing to be used, interview techniques to be
adopted in the selection process based on the level of skill, qualifications and
experience of future human resources.
 It can foresee the change in value, aptitude and attitude of human resources and
accordingly change the techniques of interpersonal management
Methods of HRA

 Capitalization of Historical Costs Method.

 Replacement Cost Method.
 Opportunity Cost Method.
 Economic Value Method.
 Standard Cost.
 Cost-Benefit Method.
 Noin-Monetary Methods for HRA(Human Resource Accounting).
 Capitalisation of Historical Cost Method

 In this approach, the actual cost incurred in 

recruiting, hiring, training, and developing the human resources of the
organization is capitalized and amortized over the expected useful life of human
resources.
 Thus a proper recording of the expenditure made on hiring, selecting, training, and
developing the employees is maintained, and a proportion of it is written off to the
income of the next few years during which human resources will provide service.
 When an employee is recruited by a firm, he is employed with the obvious
expectation that the returns from him will far exceed the cost involved in selecting,
developing, and training in the same manner as the value of fixed assets is increased
by making additions to them.

Replacement Cost Method

 Rensis Likert first developed this approach based on the concept of the
replacement cost. This method measures the cost to replace an organization’s
existing human resources. It indicates what it would cost the concern to recruit,
hire, and train, and develop human resources to match the present level of
efficiency.
 It is more realistic as it incorporates the current value of firms’ human resources
in its financial statements prepared at the end of the year.
 Opportunity Cost Method

 This method was first advocated by Kiman and Jones for a company with several
divisional heads bidding for the services of various people they need among
themselves and then include the bid price in the investment cost.
 Opportunity cost is the value of an asset when there is an alternative use of it.
 There is no opportunity cost to those employees that are not scarce, and also those at
the top will not be available for auction. As such, only scarce people should
comprise the value of human resources.
 The value of a human resource is determined based on the value of an individual
employee in alternative use. If an employee is hired from an external source, there is
no opportunity cost to him.
 Economic Value Method

 The value of a human resource is measured based on the contribution they are likely to
make to the organizations during the period of their employment.
 The soundness of the valuation depends wholly on the information, judgment, and
impartiality of the bidder. The economic value model of human resource accounting
involves estimating the total inflow of cash that will be produced by an employee
throughout his service to the company.
 Subtracting the total cost of hiring, training, developing, and paying an employee from
the estimate of the cash he will generate for the company, and you have arrived at his net
worth according to the economic value method of HR accounting.
Standard Cost

 The standard cost method of human resource accounting involves determining the
total cost of recruiting and hiring each employee, as well as the cost of any
training or development.
 According to the standard cost method, the economic value of an employee is the
total of these expenditures, and the annual economic value of the entire workforce
is equal to the total amount of money spent on recruiting, hiring, training and
developing all employees during the year.
Cost Benefit Method

 Under this method, we can calculate the total estimated benefit which is given by
the employee to an organization. Then we calculate the total value of the benefits
which is given by a company to employees and its difference is a surplus which is
a real value of the human resource asset.
Thank You