Human Resource Accounting: [PDF Inside] Method, 3 Major Aspects, Example, Objectives, Functions, Benefits, And Negatives
Human resource accounting is a type of accounting that focuses on measuring the value of a company’s human resources, such as its employees, in financial terms. The basic idea behind human resource accounting is that a company’s workforce is a valuable asset, just like its physical assets, and should be accounted for in a similar manner.
Human resource accounting involves measuring the value of a company’s human resources based on factors such as the skills and experience of its employees, their training and education, and their potential for future development.
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Human Resource Accounting Approaches/Aspects
There are three main approaches to human resource accounting:
Cost Approach:
The cost approach involves measuring the cost of recruiting, hiring, training, and developing employees. The cost is then compared to the revenue generated by the employees to determine the return on investment (ROI) of the company’s human resources. This approach is relatively simple, but it does not take into account the value of the employees beyond the cost of their recruitment, training, and development.
Economic Value Approach:
The economic value approach involves measuring the potential earnings that an employee could generate for the company over their entire career. This includes factors such as their experience, skills, and training, as well as the potential for future development. This approach provides a more comprehensive view of the value of the company’s human resources, but it can be difficult to estimate potential earnings accurately.
Opportunity Cost Approach:
The opportunity cost approach involves estimating the potential earnings that could be generated by other uses of the company’s resources, such as investments in equipment or technology. This approach helps the company determine the most efficient use of its resources, but it can be challenging to estimate opportunity costs accurately.
Example of Human Resource Accounting
Here is an example of how human resource accounting can be used by a company:
Let’s say a company has invested in a training program for its employees to improve their skills and productivity. The company wants to measure the return on investment of this training program and determine the value of its employees.
Using the cost approach, the company would measure the costs associated with the training program, such as the cost of hiring trainers, creating training materials, and paying for employee time during training. The company would then compare these costs to the additional revenue generated by the employees after the training program. For example, if the training program led to a 10% increase in productivity, the company could estimate the additional revenue generated by this increase and compare it to the cost of the training program.
Using the economic value approach, the company would measure the potential earnings of the employees over their entire careers, taking into account their experience, skills, and training. The company could use this information to determine the overall value of its workforce and make informed decisions about future investments in employee training and development.
Using the opportunity cost approach, the company would estimate the potential earnings that could be generated by other investments, such as investing in new equipment or technology. This approach would help the company determine the most efficient use of its resources and make informed decisions about its investments in employee training and development.
Objectives of Human Resource Accounting
The main objectives of human resource accounting are:
Measuring the investment in human resources:
One of the key objectives of human resource accounting is to measure the investment made in human resources by an organization. This includes the cost of recruitment, training, development, and other related expenses.
Determining the value of human resources:
Another objective of human resource accounting is to determine the value of an organization’s human resources. This can be done by measuring the skills, experience, and potential of employees, and estimating their potential contribution to the organization.
Evaluating the effectiveness of human resource management:
Human resource accounting can also be used to evaluate the effectiveness of an organization’s human resource management practices. By measuring the ROI of human resource investments, companies can determine whether their workforce management strategies are working as intended.
Providing information for decision-making:
Human resource accounting can provide valuable information for decision-making at all levels of the organization. By measuring the value of human resources, companies can make informed decisions about workforce management, strategic planning, and investment priorities.
Enhancing financial reporting:
Including the value of human resources in financial statements can provide stakeholders with a more comprehensive view of the organization’s value. This can enhance the accuracy and transparency of financial reporting.
Functions of Human Resource Accounting
The functions of human resource accounting are:
- Measurement of investment: It measures the investment made by an organization in its employees. This includes the cost of recruitment, training, development, and other related expenses.
- Quantification of human resource value: It quantifies the value of human resources within an organization. This includes measuring the skills, experience, and potential of employees and estimating their potential contribution to the organization.
- Focus on future-oriented information: It provides future-oriented information by estimating the potential value of employees to the organization.
- Integration with financial accounting: Human resource accounting is integrated with financial accounting to provide a comprehensive view of the organization’s value. This involves including the value of human resources in financial statements.
- Provides information for decision-making: It provides valuable information for decision-making at all levels of the organization. This includes workforce management, strategic planning, and investment priorities.
- Evaluates the effectiveness of human resource management: It can be used to evaluate the effectiveness of an organization’s human resource management practices by measuring the ROI of human resource investments.
- Can be customized to fit the organization’s needs: It can be customized to fit the unique needs of an organization, such as the type of workforce, industry, or strategic goals.
Methods of Human Resource Accounting
There are various methods of human resource accounting that organizations can use. Some of the commonly used methods are:
Historical Cost Method:
This method involves measuring the cost incurred by the organization for recruiting, selecting, training, and developing employees. The costs are then accumulated and recorded in financial statements.
Replacement Cost Method:
This method involves estimating the cost of replacing an employee with a similar one. The cost is based on the current market conditions and includes recruitment and training expenses.
Opportunity Cost Method:
This method involves estimating the potential earnings an employee could have generated if they were employed elsewhere. The difference between the potential earnings and actual earnings is considered as the value of the employee to the organization.
Present Value of Future Earnings Method:
This method involves estimating the future earnings of an employee based on their skills, experience, and potential. The future earnings are then discounted to their present value and recorded in financial statements.
Balanced Scorecard Method:
This method involves measuring the performance of employees based on a set of key performance indicators (KPIs) that are aligned with the organization’s strategic goals. The KPIs are then used to estimate the value of the employees to the organization.
Importance / Benefits of Human Resource Accounting
Human resource accounting is important for various reasons, including:
Better decision-making:
It provides information that can be used to make better decisions related to workforce management, recruitment, training, development, and retention. This information can help organizations allocate resources effectively and make informed decisions that support their strategic goals.
Improved financial reporting:
It provides a more comprehensive view of the organization’s value by including the value of human resources in financial statements. This can improve the accuracy of financial reporting and help investors and other stakeholders make informed decisions.
Improved workforce management:
Human resource accounting provides information on the value of employees and their potential contribution to the organization. This can help organizations make better decisions related to workforce planning, development, and retention.
Increased accountability:
It provides a mechanism for organizations to measure the return on investment (ROI) of their human resource management practices. This can increase accountability and encourage organizations to adopt more effective HR practices.
Better alignment with strategic goals:
It helps organizations align their HR practices with their strategic goals by providing information on the potential value of employees to the organization. This can help organizations make more strategic decisions related to recruitment, training, development, and retention.
Drawbacks or Limitations of Human Resource Accounting
While human resource accounting offers many benefits, it also has certain drawbacks or limitations, including:
Difficulty in measurement:
Measuring the value of human resources is complex and subjective. It involves estimating the potential future earnings of employees, which can be difficult and uncertain.
Lack of standardization:
There is no standardized method for human resource accounting, which can lead to inconsistencies in measurement and reporting. This makes it difficult to compare the value of human resources across different organizations.
Time-consuming and expensive:
Measuring the value of human resources requires significant time and resources, which can be costly for organizations. This can be a barrier for smaller organizations that may not have the resources to invest in human resource accounting.
Resistance from employees:
Employees may view human resource accounting as a way to reduce their value to the organization or as a way to justify downsizing or layoffs. This can create resistance to the adoption of human resource accounting practices.
Focus on short-term financial results:
Human resource accounting can prioritize short-term financial results over long-term investments in employee development and training. This can lead to a focus on cost-cutting rather than investing in the development of human capital.
Human Resource Accounting VS Financial Accounting
Human resource accounting and financial accounting are two different approaches to measuring and reporting organizational value. Here are some key differences between the two:
- Focus: Financial accounting focuses on measuring and reporting financial information related to a company’s assets, liabilities, and equity, while human resource accounting focuses on measuring and reporting the value of human resources to an organization.
- Timeframe: Financial accounting provides a snapshot of an organization’s financial position at a particular point in time, while human resource accounting looks at the potential long-term value of employees to the organization.
- Standardization: Financial accounting is governed by generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), which provide standardized rules and guidelines for reporting financial information. There are no standardized rules or guidelines for human resource accounting.
- Measurement: Financial accounting measures the historical cost of assets and liabilities, while human resource accounting attempts to measure the potential future value of human resources.
- Usefulness: Financial accounting is primarily used for external reporting to investors and other stakeholders, while human resource accounting is used primarily for internal decision-making related to workforce management.
How can human resource accounting be implemented in an organization?
Implementing human resource accounting in an organization involves several steps. Here are some steps that can help an organization implement human resource accounting:
Define the scope of the human resource accounting system:
The first step in implementing human resource accounting is to define the scope of the system. This involves identifying the key human resource activities that will be included in the system and determining the level of detail that will be captured.
Develop a human resource accounting methodology:
The next step is to develop a methodology for measuring the value of human resources. This may involve using one or more of the methods discussed earlier, such as the cost approach, market approach, or income approach.
Gather data:
Once the methodology has been developed, data needs to be collected to support the human resource accounting system. This may involve collecting data from various sources, such as HRIS (human resource information systems), employee records, financial statements, and performance metrics.
Analyze and interpret data:
The data collected needs to be analyzed and interpreted to estimate the value of human resources. This may involve using statistical analysis, econometric modeling, or other quantitative methods.
Report and communicate results:
The results of the human resource accounting system need to be reported and communicated to stakeholders within the organization, such as HR managers, senior executives, and board members. This may involve creating reports, dashboards, or other visualization tools to present the data in a meaningful way.
Continuously improve the system:
Finally, the human resource accounting system needs to be continuously improved to ensure that it remains relevant and useful. This may involve refining the methodology, updating data sources, or improving data quality.
How can human resource accounting help organizations in their decision-making processes?
By using human resource accounting, organizations can track the cost of recruiting, training, and developing employees, as well as the benefits that accrue to the organization as a result of these activities. This information can help organizations determine which human resource strategies are most effective and which are not.
Human resource accounting can also help organizations make decisions related to employee retention and turnover. By calculating the cost of replacing employees who leave the organization, organizations can determine the value of retaining their existing employees and invest in strategies to improve employee retention.
Furthermore, human resource accounting can be used to evaluate the impact of employee training and development programs on the organization’s performance. By measuring the value that employees add to the organization after completing training programs, organizations can make informed decisions about which training programs are most effective and which need to be improved or discontinued.
Conclusion
Human resource accounting is a valuable tool for organizations to measure and manage the value of their human capital. By quantifying the contribution of employees to organizational success, human resource accounting provides insights into the effectiveness of HR policies and practices, as well as the ROI of employee training and development programs. While there are some limitations to the approach, such as the difficulty in accurately measuring intangible assets, human resource accounting can help organizations make more informed decisions about their human capital investments and drive long-term growth and success.
