Human resource accounting is the process of recognizing and measuring investments made in an organization’s human resources, which are usually not accounted for in conventional accounting. The valuation of human resources can help organizations document their assets more accurately.
Human resource accounting refers to the process of determining the cost and value of the people, also known as human capital, working within a corporation. This includes money spent on recruiting, training, salary, and benefits of existing employees from previous months and years.
HR accounting or HRA is performed by human resources professionals with the help of various tools like surveys, performance reviews, reward & recognition, benefits, etc. They should also observe the efficacy of recruitment and retention strategies as a part of HRA.
- Employees or human resources are the most important assets of an organization. HRA delves into understanding and valuing the contributions these individuals make to the company. In simple words, HRA accounts for how much an individual team member contributes to the firm.
- It is essential for the company overall to improve workers’ productivity as well as increase their effectiveness in their work activities. Human factors ensure that the other resources are performing excellently. The healthy and growth nature of a corporate organization is replicated in human elements such as: Group Loyalty Skills Good Communication Motivations Effective Making of Decisions
Key Objectives of Human Resource Accounting
The key objectives of Human Resource Accounting are to represent the value of human resources in financial terms, which is then reflected in the organization’s financial statements, and to assess their potential and better plan workforce.
- Effective Management Decisions: Presenting the expenditure spent on acquiring, assigning, developing, and retaining employees or staff.
- Human Resource Utilization: Human Resource Accounting also aims to ensure that the workforce is employed effectively within the organization.
- Analysis of Human Assets: HRA aims to analyze whether human assets are maintained, drained, or admired.Â
- Disclosure of Human Resources in Financial Statements: It also strives to record this valuation in the accounting and disclose the data in financial statements for transparency.
- Company’s decision-making: HRA strives to help the management in making effective decisions regarding employees, and help them to decide recruitment vs promotion, and employee retention vs retrenchment.
- Development of Management Principles: This includes assisting the development of management principles and informed decision-making for the future by classifying the financial impact of numerous practices.
Features of Human Resource Accounting
Here are the core elements of HRA that must be in place for successful execution:
- Management Support: The HR analytics process requires full backing from all levels of management.
- Resource Allocation: There must be enough time, financial, and human resources for the collection of data, the creation of criteria, and the continuing HR assessments.
- Multi-functional Team: A multi-functional team is required to properly handle the complexity of HR value measurement.
- Modern HR Team: There is a need for a forward-thinking HR team that supports change and adaptation.
- Awareness Campaigns: HR-led campaigns to educate employees about the valuation process, so that they understand and are not objectified.
- Knowledge-Based Methodologies: Knowledge-driven methodologies should be developed and implemented for proper measurement.
- Strategic Relevance: Metrics should be closely aligned with the strategic goals of the company.
- Economic Consideration: Larger organizations tend to benefit economically since the costs can be burdensome for smaller firms.
- HR Information System: Implementation of a robust Human Resources Information System that includes all personnel data for efficient management.
Methods of Human Resource Accounting
There are a few of the models that have been suggested in the past for Human resource accounting and these are categorized in 2 broad sections, each having various models.
A) Cost Based Models
The cost approaches focus on calculating the expenses associated with human resources within an organization. Various methods for these cost approaches include –
- Historical Cost Method – This method involves the expenditure made by the company in hiring, training, and developing its employees. Although this method is easy, it doesn’t truly reflect human assets’ real value.
- Replacement Cost Method – The replacement cost method focuses on evaluating the amount spent in replacing an employee with a similar level of skill and experience.Â
- Opportunity Cost Method – This technique involves estimating the potential earnings of an employee if they had pursued a different career.Â
B) Value-Based Models
This method involves the measurement of the contribution that human assets are likely to contribute to the organization during their employment. Several value approach methods are–
- Present Value Method – The present value method evaluates the current value of the future cash flows an employee must generate for the company.
- Value to the Organization Method – Through this method, the most valuable employee of the organization is determined and calculated if the company is earning premium profits through the service of that employee. This helps in finding the true value of that employee.Â
- Expense Model Method – The expense model method divides the employees into two categories- Decision-making and decision-execution. Then it determines the actual cost incurred in both categories and whether it benefits the company.
| Aspect | Cost-Based Model | Value-Based Model |
| Focus | Quantifies the expenses incurred for human resources. | Assesses the economic worth based on future contributions. |
| Emphasis | Acquisition and maintenance costs over a given period. | Future services and potential contributions of employees. |
| Suitable Industries | Widely applicable across industries. | Particularly popular in the service industry. |
| Perspective | Past and present costs. | Future-oriented, considering the employee’s potential. |
| Example | Recruitment costs, and training expenses. | Estimating an employee’s value based on future services. |
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Benefits of Human Resource Accounting
These are the 10 key benefits and importance of human resource accounting:
- Better decision-making: HRA helps management to make strategic decisions about hiring, acquisition, retaining, promotion, compensation, and more.Â
- Performance evaluation: Human resources accounting can help the organization track employees’ performance and assess improvement areas.
- Data collection: HRA assists corporations in collecting precise and inclusive data and information on HR-related expenses and activities.
- Better human resources planning: Through HRA, companies can better assess and plan their workforce.
- Analyze investment insights: With HRA, the company can evaluate its investment in manpower and expected returns.Â
- Helps employees improve their performance: HRA is helpful for employees to understand their performance and bargaining power.Â
- Track effectiveness of HR: Human resource accounting is also important to help firms understand whether HR strategies are effective or not.
- Quantifies Labor intensity: HRA aids the organization in calculating the difference between human to non-human ratio labor output.
- Enlighten long-term investors: Human resource accounting guides investors seeking long-term engagements in service sector companies.
- Boosts Productivity and Morale: HRA assists in increasing productivity by recognizing human talent, devotion, and skills as valuable assets, boosting employee morale.
Limitations of Human Resource Accounting
While human resource accounting has various advantages, there are several limitations to this approach:
- HRA relies on subjective evaluation of the workforce, which can lead to consistency in measuring human capital. Favoritism or biases can influence these assessments. Further, the lack of standardization in evaluating them can also affect the accuracy of the collected data.Â
- Human resource accounting doesn’t measure abstract factors like employee motivation, job satisfaction, and organizational culture. Although these factors play a vital role in the productivity and success of a company, it is difficult to quantify them.Â
- The process of HRA can be time-consuming, involving ample data collection and analysis, especially for companies with limited resources.Â
- Human resource accounting requires specialized software and trained professionals, which are expensive and, hence difficult for SMEs to conduct HRA.
- Rather than long-term benefits like employee development and retention, HRA typically focuses on short-term benefits, like productivity and profitability.
Final Words
Human resource accounting facilitates companies in observing and managing their human capital effectively. With its calculation of the value of employees, HRA assists in making informed decisions regarding hiring, promotion, retention, termination, and more. It allows the management to optimize the workforce of the organization, supporting transparency and accountability, which gives stakeholders an understanding of their investment in human capital and its impact. Besides, aligning human resource strategies with broader organizational goals can drive companies to improve their overall performances and success.
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FAQs
1) What are the methods of HRA?
Ans:- The methods of HRA are divided into two broad sections: Cost-based models and Value-based models, each serving specific objectives. The cost-based method stresses evaluating the costs associated with human resources within an organization. Whereas, the value-based method includes the calculation of the contribution that human assets are likely to contribute to the organization during their employment.Â
2) What is the Morse model of human resources accounting?
Ans:- Developed by Richard Morse, a professor of accounting at the University of Southern California, this model is a theoretical framework to evaluate the value of an organization’s human capital and make strategies for intensifying its potential. Â
3) Who is the father of human resource accounting?
Ans:- George Elton Mayo is known as the founder of human resource (HR) management and is often called the father of human resource accounting.
4) What are some specific tools or software available to automate the Human Resource Accounting process?
Ans:- Several tools like SAP SuccessFactors and Oracle HCM Cloud can automate HRA. For smaller businesses, tools such as Zoho People or GreytHR provide more affordable options with automation for HRA-related tasks. These platforms help HR to track employee performance, and assess recruitment costs, and training investments.
5) Why is the importance of Human Resource Accounting?
Ans:- Human resource accounting is important as it empowers organizations to make informed decisions regarding hiring, training, salary, development, and resource allocation to drive overall growth.
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