Human resource accounting (HRA) is a way of measuring and reporting the value of your employees as assets of your organization. It can help you optimize your human capital management, enhance your decision-making, and increase your profitability. In this blog post, we will explain what human resource accounting means, what are its objectives and methods, and what are its benefits for your business.
Human Resource Accounting Meaning
According to Finance Strategists, human resource accounting means accounting for human beings, which constitute the most important resource within any organization. Accounting for human resources involves dealing with the measurement of costs associated with recruiting, selecting, hiring, training, placing, and developing the employees within an organization.
Human resource accounting also involves measuring the value of employees as sources of income and competitive advantage for the organization. It recognizes that employees are not just expenses but investments that can generate returns over time.
Objective of Human Resource Accounting
The main objective of human resource accounting is to provide accurate and relevant information about the human resources of an organization to various stakeholders such as managers, investors, regulators, and employees themselves. Some of the specific objectives of human resource accounting are:
- To measure the cost related to the human resource of the organization
- To enable management to properly plan and budget for training and other services for the human resource
- To ensure proper utilization of resources is done or not
- To increase awareness and value about human resources
- To proper accounting of retiring benefits and other benefits over the service period
- For efficient and better human resource planning
- For determining actual cost incurred by the organization on human resources
- To determine whether an organization has gained from inputs put on human resources such as training, recruitment, and other facilities
- To aid top management on human resource analysis
Methods of Human Resource Accounting
There are two major approaches to measure and report the value of human resources: cost approach and value approach.
Cost Approach Method
In this method, the value of human resources is based on the costs incurred by the organization on acquiring, developing, and maintaining them. There are two methods under this approach:
- Acquisition Cost Method: In this method, the value of human resources is equal to the sum of all costs related to recruitment, selection, hiring, training, and placement of employees. These costs are capitalized and amortized over the expected service period of the employees.
- Replacement Cost Method: In this method, the value of human resources is equal to the current cost of replacing them with similar or equivalent employees. This method considers the costs of finding, hiring, and training new employees as well as the opportunity cost of losing existing employees.
Value Approach Method
In this method, the value of human resources is based on their contribution to the organization’s performance and future potential. There are three methods under this approach:
- Present Value Method: In this method, the value of human resources is equal to the present value of their future earnings or cash flows. This method discounts the expected income or cash flows generated by employees over their remaining service period using an appropriate discount rate.
- Value to the Organization Method: In this method, the value of human resources is equal to their impact on the organization’s goals and objectives. This method considers both quantitative and qualitative factors such as productivity, quality, innovation, customer satisfaction, loyalty, etc.
- Expense Model Method: In this method, the value of human resources is equal to the sum of all expenses incurred by the organization on human resources such as salaries, wages, benefits, incentives, etc. This method treats human resources as an expense rather than an asset.
Benefits of Human Resource Accounting
Human resource accounting can provide several benefits for your business such as:
- Improving your human resource management practices by identifying the strengths and weaknesses of your employees, evaluating their performance, and rewarding them accordingly
- Enhancing your decision-making process by providing relevant and reliable information about the cost and value of your human resources
- Boosting your success and edge against competition by making the most of your human capital investment, lowering staff churn, and raising satisfaction and commitment from staff.
- Talk about how you’re showing your corporate image & responsibility by showing the value of your people to investors, customers, regulators, and the whole world.
- Following the accounting standards and rules that necessitate or motivate reporting of human resource data.
Human resource accounting is an effective means of measuring & showing how valuable your employees are to your organization. It can help you get the most out of your workforce, make decisions easier, and boost your profits and edge up against the competition. If you use the right techniques and models of human resource accounting, you can track the expenses and worth of your human resources. You can get stakeholders to see the value of your human resources, and make your organization look better in the public’s eye, plus show you’re socially responsible.