What is Human Resource Accounting? Definitions, Objectives, Methods, Advantages, Limitations

One of the major highlights of this approach is the concept of certainty equivalent which includes the probability of an employee continuing in the organization and the probability of his survival. It views compensation policies, promotion policies, industry averages, labor market conditions, and skills requirements as a major determinants of the cost of human resources. Further, factors such as age and remaining years of service are also taken into consideration. Human resource accounting is the art of valuing, recording, and presenting the work of all human resources in an organization’s accounts. It can help management make vital decisions about selection, layoff, transfer, training, and promotion.

What are human resource accounting and its benefits?

For instance, the cost of training incurred to update the skills and knowledge of the employees were treated only as an expense and not as an investment. According to this approach, the certainty with which the net benefits in the future will accrue should also be considered while determining the value of human resources. Lev & Schwartz advocated the estimation of future earnings during the remaining service life of the employee and then arriving at the present value by discounting the estimated earnings at the cost of capital. The non-monetary methods for assessing the economic value of human resources also measure the Human Resource but not in dollar or money terms.

Opportunity Cost

1. Human Resource accounting helps the management to utilize Human Resources in an effective manner as it optimizes the ability of human resources.
2. It should also be used to measure the effectiveness of employee training programs and evaluate employees’ performance.
3. The modern view is that cost incurred on any asset as human resources need to be capitalized as it provides benefits measurable in monetary terms.
4. The value of an individual to an organization may be defined as the present value of the set of future services that the individual is expected to render during the period they are likely to work for the organization.
5. It assists in determining whether to give or decrease pay, bonuses, leave, and so on.

A compensation and benefits report is a report that provides information about an employee’s salary, benefits, and other compensation details. No, the information provided in the financial reports from outside sources is not sufficient to make decisions related to human resources. For example, one does not find labor costs reported in the income statements of general corporations which totals less than 1 percent of total sales revenue. The labor cost presents in the income statement is net of deferred compensation.

Morse Model

Human Resource accounting quantifies the value of human resources just like assessing the value of physical assets. This helps the organization to understand the actual worth of the human resource. Such additional costs incurred in training and development are also capitalized and is amortized over the remaining life. Here the value of human resources depends on the present value of future earnings to be made from a person’s employment.

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A proportion of it is written off to the income of the next few years during which human resources will provide service. According to Likert (1985) replacement cost includes recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff. The deferred portion not written-off should be shown in the balance sheet of the organisation. 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. Human Resource accounting is not regulated by any authority and it does not have any principles, conventions, or concepts which are related to it.

Under this, the human resources data is used to set standard costs for various human resource years. The employees are classified into different groups or grades based on their position in the organization. In order to determine the value of human resources, the cost of recruiting, training, and developing new people as suitable replacements is considered.

The value of human resources equals the present value of employees’ future earnings until retirement. In case the human asset expires before the end of the expected life period or leaves the organisation prematurely, the unamortised cost remaining in the books has to be written-off against the profit and loss account of the particular year. The amounts paid as wages and salaries were treated as revenue expenditure and no effort was made to find out the cost of hiring, training and development of human beings.

In order to track employee performance effectively, HR professionals need to use a variety of tools. An employee survey is a method for collecting data from employees about their experiences with their employers. A performance review is a method for evaluating an employee’s performance against desired standards. Finally, HR professionals also need to track compensation and benefits reports.

A copy of 11 Financial’s current written disclosure statement discussing 11 Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – from 11 Financial upon written request. Examples of the types of factors that influence these variables are the skill and motivation of the employees, the role in question, and the nature of organizational rewards. Such a change in attitude usually has a major impact on managerial decisions involving human resources. Hekimian and Jones (1967) proposed that when an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that division’s investment base.

If the useful life recognised is longer than the original expected life, the amortisation is to be rescheduled. This is an extension of the “net benefit approach,” as suggested by Morse. Rensis Likert, in the 1960s, was the first to research HRA(Human Resource Accounting) and emphasized the importance of strong pressures on HR’s qualitative variables and its benefits in the long run. The method has practical applicability when the availability of quantifiable and analyzable data is concerned. Opportunity cost is the value of an asset when there is an alternative use of it.

Human Resource accounting helps the management to utilize Human Resources in an effective manner as it optimizes the ability of human resources. These individuals tend to speak passionately about their work or overall profession and often provide concise responses that include real-life examples without being prompted by interviewers. SMART individuals refer to team efforts and often use the word “we” instead of “I.” They are quick to point out collaborative work with other team members in achieving goals.