Human Resource Accounting by AijazAryan

1. Human Resource
Accounting Aijaz Ahmed Rather
I.K.G Punjab Technical University

2. Human Resource
Accounting(HRA)
Human Resource Accounting may be
considered as such an accounting system
which recognizes the human resources as
asset and records it in the books of account
after measuring its value in the same way as
other physical resources.
According to Flamholtz, “HRA is
the measurement of costs and value of the
people for the organization”.

4. Features Of HRA
It is a system of accounting in which identification of
human resources is made.
Investments made in human resources are recorded.
Measurement of cost and value of Human resource is
made.
Record is also maintained for the changes occurring in
human resources over a period of time.
Information generated about human resources is
communicated through financial statements to the
interested parties. Thus HRA is a part of Management
Information System(MIS).

5. Objectives Of HRA
1)HRA helps in determining the return on investment on
human resources.
2) It helps in knowing whether the human resources
have been properly utilized or not.
3)It provides quantitative information on Human
Resources which will help management and investors in
decision making.
4) To communicate the worth of human resources to
the organization and the society at large.

6. Objectives Of HRA
Rensis Linkert, one of the earliest proponents of HRA has
listed following Objectives.
1) To furnish cost value information for making
management decision and maintaining human
resource in order to attain cost effective
organizational objectives.
2) To allow management personnel to monitor
effectively the use of Human Resources.
3) To provide sound and effective basis for asset
control.
4) To aid in the development of management principles
by classifying the financial consequences of various
practices.

7. Methods of HRA
Historical Cost
Method
Capitalization of
Salary Method
Adjusted
Discounted
Future Wages
Method
Replacement
cost Method
Economic
Valuation
Method
Reward
Valuation
Method
Opportunity
Cost Method
Return on
Efforts
Employed
Method
Approaches
and Methods
are same

8.  It was developed by Brummet,Flamholtz and Pyle.
 According to this method ,the cost incurred on
recruiting, selecting,training,placing and
developing the human resources of an enterprise
are capitalized and written off over the expected
useful life of human resources.
 The procedure followed for human resource asset
is same as that of physical asset.
 Any amount spent on training and development
increase its efficiency and hence capitalized.

10.  This method was developed by Rensis Likert and
Eric G. Flamholtz.
 The cost of replacing employees is used as the
measure of company’s human resources.
 The human resources of a company are to be
valued on the assumption as to what it will cost the
concern if the existing human resources are
required to be replaced with other persons of
equivalent experience and talent.

11.  It was developed by Hekimian and Jones,
which determines the value of Human
Resource on the basis of an employee’s value
in alternative uses.
 The value of an employee would be high if he
has several alternative uses for employment
in the various divisions of an employee.
 Opportunity cost is linked with scarcity.

12.  This method was given by Baruch Lev and
Aba Schwartz.
 According to them the salaries payable to
employees during their stay with the
organization may be used as a surrogate for
the value of human resources.
 The value of human resources is the present
value of future earnings of homogeneous
group of employees(i.e like us how others will
contribute in the future)

13.  Economic Valuation method considers the
present worth of the employees future service
expected to be derived their stay with the
organization as the value of firm human
resource.
 The value of HR is determined on the basis of
the expected services of the employees in
each service state that they occupy during
their stay in the Organization.

14. This method measures the value of the firms
human resources on the basis of the effort
made by the individual for the organizational
benefit.
Efforts are evaluated in the lights of following
factors.
 Positions an employee holds
 Degree of Excellence employee achieves.
 Experience profile of the employee.

15. Adjusted Discounted Future Wages
Method
• It was developed by Roger H. Hermanson.
• This method measures the value of human
resources on the basis of relative efficiency of
an organization in the industry.
• This model relates the value of Human
resource with the extra profit the firm earns
over and above the industry expectations.
Efficiency Ratio= Actual Average Earnings of the firm
Normal earning of all firms

16.  As an improvement over the capitalization of
salary method Flamholz developed model
commonly known as Stochastic Rewards
Valuation Method.
 This method seeks to measure the value of
human resources on the basis of an
employees value to an organization at various
service states(roles) that he is expected to
occupy during the span of his working life
with the organization.

17. Advantages/Merits of HRA
 Improvement in internal management
system: HRA helps in making internal decision
better.
 Motivation of employees for production
Purposes: HRA helps in finding the time cost of
Human Asset. If hourly time cost of this asset is
brought the knowledge of various classes of
employees it is hoped that they may devote their
every sec for productive purpose only.
 Saving of time in meetings of the executive: If
the value of time of executives is known to them,
they can devote the most reasonable times in
meetings

18. Merits
 Knowledge of value of employees on
the basis of training
 Knowledge about the economic value
of the Personnel
 Decision about further Recruitment

19. Disadvantages/Demerits
 Objection about Treating employees as
Assets:
Some person are against the view that employees
are assets. They say that if employees are bracketed
as assets, they will come in the category of slaves.
 Non-Availability of Standard:
Certain Standards are needed to measure the HR.
At present adequate standards are not available for
such measure.
 Expenditure on HRA:
When HRA is adopted. It is certain that additional
expenditure will be incurred on it and this will reduce
the profit.

20. •Variety of Methods:
For valuation of HR there are various methods, hence
they create confusion so far as adoption of particular
model is required.
• Category Of Asset:
There is no Certain about the category to which this asset
of HR should belong.
• Lack Of Perfect Knowledge about Future
earnings of HR:
No perfect knowledge about future earnings of HR can
be made when world is full of uncertainties.