Name Tania Nava
Roll No. 344
Course TYBMS
Subject Human Resource Audit &
Accounting
Topic Methods of Human Resource
Accounting and its impact on
growth of business.
METHODS OF HUMAN RESOURCE
ACCOUNTING AND ITS IMPACT ON GROWTH
OF BUSINESS.
Human resource accounting is accounting and recognition of expenses related to employees
of the organization and involves costs related to recruitment, selection, training, hiring etc.
Human Resource Accounting is the process of identifying and measuring data about Human
Resources and communicating this information to the interested parties. It is an attempt to
identify and report the Investments made in Human Resources of an organisation that are
currently not accounted for in the Conventional Accounting Practices.
OBJECTIVES
The objectives of Human resource accounting are as follows –
Measuring cost related to the human resource of the organization
Enabling 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.
Increasing 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, training, recruitment, and other facilities.
To aid top management on human resource analysis.
METHODS OF HUMAN RESOURCE ACCOUNTING
The methods of human resource accounting are as follows –
A. Cost Approach Method
In the cost approach method, we have two methods:
1. Acquisition Cost Method
In the acquisition cost method, organizations capitalize on all costs related to human
resources (like training, welfare, and another cost) of the organization and amortize it in
the profit and loss account throughout from appointment till retirement.
2. Replacement Cost Approach
This method is used to determine whether to keep working or replace the worker. It considers
the cost of replacing the human resource or employee. This method also helps in determining
whether the appointment of employees is beneficial to the organization or not.
Individual Replacement Costs – which refers to the cost that would have to be
incurred to replace an individual by a substitute who can provide the same set of
services as that of the individual being replaced
Positional Replacement Costs – which refers to the cost of replacing the set of
services referred by an incumbent in a defined position
3. Opportunity Cost:
This method of measuring Human Resources under this Model is based on the concept of
opportunity cost i.e. the value of an employee in its alternative best use, as a basis of
estimating the value of human resources. The opportunity cost value may be established by
competitive bidding within the firm, so that in effect, managers bid for any scarce employee.
A human asset therefore, will have a value only if it is a scarce resource, that is, when its
employment in one division denies it to another division.
B. Value Approach Method
In a value approach, we have three methods:
1. Present Value Method
In this method, the present value of all future benefits to employees is determined to know
whether the organization can afford the cost and can be able to gain in the future from cost
incurred on human resources.
2. Value to the Organization Method
In this method, the most valuable employee of the organization is determined and measured
whether the organization is earning premium profits from the services of that employee and
helps in finding the value of that employee.
3. Expense Model Method
This method divides the employees into two categories: Decision-making category and
decision execution category, and then determine the actual cost incurred on both categories
and determine whether it is beneficial to the organization or not.
IMPACT ON GROWTH OF BUSINESS
There are positive and negative impacts of HRA on the growth of business
BENEFITS
1. Managerial decisions can be improved with the help of Human Resource Accounting.
2. It helps management to implement the best methods of salary, wages, and overtime
administration.
3. The system of Human Resource Accounting discloses the actual value of the human
resource and its benefit from the same.
4. Proper and efficient utilization of manpower resources;
5. Productivity can be increased.
LIMITATIONS
1. There is no standard procedure for valuing human resources.
2. All methods of valuation are based on assumptions.
3. The life of working cannot be adequately estimated due to certain factors that are not
in the hands of the organization. Hence valuation can be seen as unrealistic.
4. Different methods used by various firms in the industry; hence no comparison can be
made with the industry.
5. Employee turnover is ignored in valuation.
CONCLUSION
Human Resource is the most critical asset of any organization. The organization will run
properly and will be able to stand in the long run because of its efficient human resources.
Hence its accounting is vital. Accounting of human resources is based on certain
assumptions; thus proper valuation is not possible. There are certain limitations of human
resource accounting
REFERENCES:
Human Resource Accounting
Human Resource Accounting benefits and disadvantages
