Human resource accounting
HUMAN RESOURCE ACCOUNTING
Human resource Accounting (HRA) is a new branch of accounting. It is
based on the traditional concept that all expenditure on human capital
formation is treated as a charge the revenue of the period as it does not
create any physical asset. But now a days this concept has changed and cost
incurred an any asset should be capitalized as it yields benefits measurable
in monetary terms.
Human Resource Accounting is the process of assigning, budgeting,
and reporting the cost of human resources incurred in an organization,
including wages and salaries and training expenses.
Human Resource Accounting is the activity of knowing the cost
invested for employees towards their recruitment, training them, payment
of salaries & other benefits paid and in return knowing their contribution to
organization towards its profitability.
According to AMERICAN ACCOUNTING SOCEITY COMMITTE ON HRA
“Human resource accounting is the process of identifying measuring data
about human resource and communicating this information to interested
The objectives of Human resource accounting are as follows –
• Measuring cost related to the human resource of the
• 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
• To determine whether an organization has gained from inputs
put on human resources, training, recruitment, and other
• To aid top management on human resource analysis.
Advantages of HR Accounting
Human Resource Planning anticipates not only the required kind and
number of employees but also determines the action plan. The major
benefits of HR accounting are:
• It checks the corporate plan of the organization. The corporate
plan aiming for expansion, diversification, changes in
technological growth etc. has to be worked out with the
availability of human resources for such placements or key
positions. If such manpower is not likely to be available, HR
accounting suggests modification of the entire corporate plan.
• It offsets uncertainty and change, as it enables the organisation
to have the right person for the right job at the right time and
• It provides scope for advancement and development of
employees by effective training and development.
• It helps individual employee to aspire for promotion and better
• It aims to see that the human involvement in the organisation is
not wasted and brings high returns to the organisation.
• It helps to take steps to improve employee contribution in the
form of increased productivity.
• It provides different methods of testing to be used, interview
techniques to be adopted in the selection process based on the
level of skill, qualifications and experience of future human
• It can foresee the change in value, aptitude and attitude of
human resources and accordingly change the techniques of
Methods of Human Resource Accounting
1.Historical Cost Method
Under the Historical cost method, the sum total of all the costs related to human
resources is calculated to find out the value of a human resource. These costs include
the cost of recruitment, selection, training, placement, and development of human
resources of an organization.
Historical Cost Method was introduced by Brummet, Flamholtz and Pyle. This is the
oldest method of valuation of human resource.
Types of Historical Cost Method
1. Acquisition cost: It means the cost which is incurred on acquiring the human
resource in the organization. The cost incurred at the time of recruitment,
selection, and placement, etc
2. Learning Cost: It means that cost is incurred at the time of providing training
and development to the employees and managers.
Advantage of historical cost method
• This method is very easy to calculate the value of a human resource.
• Employers and employees can easily understand this method.
• This method follows the traditional accounting concept of matching costs with
• Return on the company’s investment in human resources can easily be
calculated by this method.
Disadvantage of historical cost method
• Under this method it is very different to estimate the service period of an
• In this method rate of amortization is very difficult to determine.
• As we know, the value of assets decreases with an increasing number of years
or amortization. But in the case of human resources, it is just the opposite.
The utility of employees increases with the increasing experience and training
provided to them.
2.Replacement Cost Method
Replacement cost is that cost which is incurred on replacing the existing human
resource by an identical one i.e. human resource capable of rendering similar
services. This method is different from the historical cost method.
The historical method takes into account only the sunk cost which is immaterial to
calculate the value of human resources and take a decision on that basis.
The replacement cost method is very realistic as it considers the current value of
human resources in its financial statement.
Advantage of replacement cost method
• This method estimates the present value of human resources. This method is
very logical and representative.
• This method can easily adjust the human value of price trends and can provide
real value at the time of the rise in prices.
Disadvantage of replacement cost method
• The identical replacement of an employee is not always possible to find.
• The cost of replacing the human resource is inconsistent with traditional
accounting system based on the cost concept
4.Present Value Method and Economic Value Method
Present value method, the future earnings of the employees are estimated up to the
retirement period and is discounted at a discount rate which is usually the cost of
Economic value method present worth of the employee is calculated on the basis of
the future service that is expected from him till his retirement.
Under this methods value of a human resource is calculated on the basis of the
contribution made by the employees in the organization till their retirement. The
payment due to the employees in the form of pay, allowance, and benefit etc. are
estimated and then discounted to arrive at a present economic value of the
advantage of economic value method
• Employee’s career movements are taken into account under this method.
• The possibilities of employees leaving the organization other than death or
retirement are also considered.
Disadvantage of economic value method
• The service tenure of an employee is very difficult to estimate
• The value of expected services data is very difficult to find.
• Estimation of employee’s chances of occupying various positions for each
employee is not an easy task.
• Valuation of the contribution of services from employees is also not easy to
• To estimate the exit probabilities and changes from one position to another is
an expensive process.
Asset Multiplier Method
Asset Multiplier Methods consider that there is no direct relationship between the
cost incurred on human resource and how much value he is for the organization. The
value of human resources depends on various factors like the level of motivation and
employee attitude towards work and the organization.
Here multiplier refers to instruments that relate personal worth of human resource
to the total asset value of the organization.
Employees of the organization are divided into four categories under this method
Asset Multiplier reflects the following factors:
Technical, qualification and experience of employees.
Experience required for the job.
Personal qualities and attitude.
Loyalty and expectation of future services.
Advantage of asset multiplier method
• This method is simple and easy to understand.
• Data for calculation is easily available.
• Multipliers used in this method are different for a different group of
Disadvantage of asset multiplier method
This method considers factors like motivation, employee’s attitude which are difficult