This article has been written by RamaKrishna pursuing a Diploma in US Tax Compliance from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

Human resource accounting is a method to use human resources effectively for achieving the desired results. It helps the organisation find out the actual costs incurred for recruiting the required human resources. Human resource accounting started in the 1960’s. This method is used as a significant tool in finding out the value of the employees as human resources. The Father of Human Resource Accounting is “George Elton Mayo.”

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Human resource accounting offers several advantages, like enhancing decision-making, evaluating HR investments, and assessing employee performance. The difficulty of accurately qualifying the value of human capital, the subjectivity involved, and the challenges of future predictions are the major limitations of human resource accounting. HR Accounting needs great expertise and should be done in the right manner.

The role of human resource accounting in the organisation is to measure the cost of recruiting and training. And also to develop the employee, individually and collectively. Components of human resource accounting are to identify the requirements of the employees in the organisation and to develop proper human resources for the organisation.

Definition

According to Stephen Knauf, “Human Resource Accounting is the measurement & quantification of human organisational inputs such as recruiting, training, experience & commitment.

M.N. Baker defines human resource accounting as follows:

“Human resource accounting is the term applied by the accounting profession to quantify the cost & value of employees to these employing organisations.”

American Association of Accountants define- “HRA is a process of identifying and measuring data about human resources and communicating this information to interested parties.”

According to Woodruff Jr. – “HRA is an attempt to identify and report investments made in the human resources of an organisation that are not accounted for under conventional accounting practice. It’s an information system that tells the management what changes over time are occurring to the human resources of the business.”

“Human Resource Accounting is a method of quantifying the value of employees as assets in an organisation. It involves measuring their contributions to productivity, skills and experience to assess their impact on the company’s performance. This approach allows businesses to better understand the value of their workforce and make informed decisions about talent management and investments in human capital.”

Features

  • Recruitment and selection of human resources: Various methods are followed in selecting the applicants for the job.
  • Records for management: It will keep recording of day-to-day tracking of the human resources.
  • Continuous update of information: Employee skills, knowledge and experience are continuously monitored and recorded.
  • Evaluation of human resources: Human Resource Accounting provides feedback on the performance of the employees. Provides the analysis where the employee performance improvement is to be done.
  • Employee capital: With the help of human resource accounting, organisations can know the employees working hours, Turnover and absenteeism.
  • Payroll: With the proper maintenance of the payroll, we can know the human capital, payroll taxes, overtime allowances and other expenses incurred for the employees.
  • Employee benefits: Health insurance, retirement Benefits and other perks will also be analysed by the Human Resource Accounting.

Objectives of human resource accounting

 The following are benefits of human resource accounting:

  • Human resource management: HRA provides the framework to manage human resources better strategically. This happens by assigning the financial value for employees and organisations to make informed decisions about recruitment, training, development, and retention.
  • Valuation of human resources: HRA aims to measure and report the economic value of employees to the organisation. This involves developing methods to quantify the knowledge, skills, experience, and potential of the workforce.
  • Better resource allocation: By understanding the value of human resources, organisations can allocate resources. This includes investing in employee development programs and creating a positive environment for working.
  • Performance enhancement: HRA is used to identify and track key performance indicators related to human capital. This information can be used to improve employee performance, productivity, and overall organisational effectiveness.
  • Employee motivation and incentives: When employees know that the contributions were valued and measured, it can boost morale and motivation. HRA can be used to design incentive programs to reward employees for performance and contributions to the organisation’s success.

Human resource accounting manages the human capital effectively

Human resource accounting develops policies and programs for the better development of employees.

  • Human capital study about the number of hours the employee is working, absenteeism of the employee and the turnover
  • Evaluation of Human Resources is useful for the evaluation of the employees working capability and can make improvements in areas of necessity.
  • Payroll analysis is an effective tool to control the overtime of the employee as well as the taxes incurred for the employee.
  • Continuous updating of the employee records will allow the organisation to analyse the skills of the employee and can be used in an optimistic way.

What are the different methods used in human resource accounting 

There are different ways or methods in which the human resource accounting will be calculated.

  • Replacement cost method: The cost of replacing an employee in the place of a previous one is called replacement cost. This cost includes recruitment, training and other benefits provided to the present employee.
  • Cost-based Method: This method also includes the cost of benefits provided to the employee.
  • Income-based Method: In this method, human resources are evaluated based on the revenue generated by the employee to the organisation and Prophets. 
  • Market-based Method: It is a comparative study method. The salaries, wages, and other perks provided in another organisation will be compared with the salaries, wages, and other perks provided to the similar position employee in his organisation.
  • Recruitment Cost Method: This method calculates the total cost of recruiting and hiring the employees, as well as the cost of training and development. The cost of these expenses is considered the value of an employment.
  • Historical Cost Method: It calculates an employee value based on the total costs incurred for hiring the employee. This method is simple to apply. The drawback of the historical cost method is to make a decision on which costs are to be capitalised and which costs are to be considered as expenditures.

Advantages and disadvantages of human resource accounting 

Advantages

  • Improving decision-making: HRA provides a comprehensive view of the workforce’s value, enabling management to make more informed and strategic decisions. By understanding the financial implications of human capital investments, organisations can optimise workforce planning, allocate resources efficiently, and evaluate the impact of HR initiatives. This data-driven approach enhances decision-making across various areas, including recruitment, training, performance management, and succession planning.
  • Evaluation of HR investments: HRA facilitates the evaluation of HR programs and initiatives by measuring their return on investment (ROI). Through cost-benefit analysis, organisations can assess the financial impact of training programs, employee development initiatives, and other HR interventions. This allows for better resource allocation and ensures that HR investments are aligned with organisational goals and deliver tangible results.
  • Employee performance assessment: HRA provides a framework for assessing employee performance beyond traditional metrics. By considering the economic value that employees contribute to the organisation, HRA enables a more holistic evaluation of individual and team performance. This information can be used to identify high-potential employees, determine training and development needs, and tailor performance management strategies.
  • Better human resources planning: Strategic workforce planning and effective resource allocation are the bases for human resources planning.
  • Increases employee motivation: Recognition and appreciation and performance-based incentives will play a vital role in employee motivation.

Disadvantages

  • Subjectivity and lack of standardisation: Assigning financial value to human capital is a very challenging task, as skills, knowledge and experience are the intangible assets of human capital.
  • Complexity and resource requirements: Data collection, analysis and expertise in the analysis are the basic disadvantages in human resource accounting.
  • Ethical concerns: Ethical concerns arise when there is a lack of transparency, objectivity and fairness in the treatment of human resources.
  • No clear-gut guidelines: Universally accepted accounting guidelines are not available. Assessing the organisational workforce is really a difficult task for stakeholders.
  • Continuous process: On-going process is needed. Human Resource Accounting must adapt to the changes and adjustments for defining the human capital accurately.

Human resource concepts

Human Resource Accounting can be examined from 2 types of Concepts

  • The expenditure incurred by the organisation for recruiting, training and the development of the employee during his tenure with the organisation.
  • Expected Rate of Return on the above expenditure incurred on an employee in the future.

Traditional Accounting Practice

There is no specific way to measure the monetary value of human resource accounting as a traditional accounting practice.

Human Resource Accounting is a way that helps to generate monetary value for an organisation. This provides a better way to understand the records of the human resource, which can be used towards planning, training and development. Traditionally, all the expenses incurred towards recruitment, selection, training and development are taken into consideration, in the calculation of the same. Among the traditional accounting practices – standard costing, variance analysis, return on investment and capital budgeting are the major.

Conclusion

Human Resource Accounting is a process of estimating the cost incurred on recruiting, Staffing and training of an employee. The major setback of this concept is a lack of guiding principles, concepts, Conventions and a regulatory body to guide the same.

Human resource accounting is the process of estimating the cost benefit of investments on human resources with a view to assessing its value to the organisation. There are two approaches to the study of human resource accounting: cost based approach and value based approach. The weaknesses of human resource accounting are lack of real ownership, lack of guiding principles, concepts, conventions and a regulatory body, lack of recognition by tax authorities, possible opposition from employees and their union, and the absence of adequate awareness and research.

References 

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