Definition
Human Resource Accounting (HRA) is a financial approach used to quantify the cost and value of employees to the organization. It involves measuring costs related to recruitment, training, development, and compensation. It also estimates the economic value of knowledge, skills, attitudes, and abilities that employees bring to a firm.
Key Takeaways
- Human Resource Accounting (HRA) is a field of accounting that systematically identifies and reports investments made in the human resources of an organization that are not presently accounted for in conventional accounting practice.
- Its primary goal is to facilitate effective management within an organization through the provision of relevant information concerning the cost and value of human resources in decision-making processes.
- Additionally, implementing HRA can lead to better understanding of the return on human capital, enhance the management function and human resource development, and help attract and retain top talent by showcasing investment in human capital.
Importance
Human Resource Accounting (HRA) is a key accounting concept that identifies the crucial relationship between a company’s human resources and its profitability.
The term refers to the financial measurement or quantification of human capital, which enables companies to analyze the cost and value of their employees in concrete financial terms.
This is important because it facilitates informed decision-making about human resource management, influencing strategies for recruitment, training, development, and retention.
HRA allows firms to optimize their workforce, leading to improved efficiency, productivity, and ultimately, financial performance.
It also reveals the potential return on investment from investing in employees, thus underlining the immense value of human assets.
Explanation
Human Resource Accounting (HRA) serves a crucial role in the financial landscape by recognizing and documenting the potential knowledge, skills, and abilities of an organization’s employees as economic assets. The primary purpose of HRA is to facilitate effective management decisions by bringing significant human aspects into the picture, which traditional accounting methods tend to overlook.
It goes beyond the conventional financial and cost data, offering qualitative information about the human resources, such as their capabilities, competence, motivation, and potential future performances, thereby affecting the company’s strategic planning and operational decisions. Moreover, HRA can be utilized for a broad range of purposes like capital investment decisions, employee performance evaluations, and productivity analysis, among others.
It aids corporations in ensuring optimal human resource investment, management, and utilization by quantifying the cost and value of employees. In essence, Human Resource Accounting allows businesses to better assess human capital’s contribution to organizational success, thereby promoting greater transparency, accountability, and effective human resource management strategy.
Examples of Human Resource Accounting
Human Resource Accounting (HRA) is a method of accounting where a company’s human resources are not treated as expenses but are considered as assets and are quantified in monetary terms.
Infosys: The Indian multinational company is one of the prominent examples that apply this approach. Infosys holds a clear report in quantifying the efficiency of its employees concerning the financial output. This has shown the significance of its human resources in achieving its financial goals and success.
Bharat Heavy Electricals Ltd. (BHEL): This Indian government-owned engineering and manufacturing company also implements HRA. It appraises the cost and value of its employees to have a clearer picture of their efficacy and to better allocate resources and improve working conditions. BHEL started implementing HRA practices in the late 1970s and it helped them in deciding the areas where investment in human resources could be beneficial for the company.
Steel Authority of India Limited (SAIL): SAIL also uses human resource accounting practices to measure personnel management effectiveness and human capital development. They evaluate the return on the investment they put into training and developing their employees, keeping a track of the efficiency and productivity levels, which can then further be utilized in strategic decision-making processes. In all these examples, HRA is used to better understand, control, and manage the key asset that these firms have – their personnel. By treating humans as capital assets, companies are able to better invest in employees and help grow the firm’s overall value.
FAQs on Human Resource Accounting
What is Human Resource Accounting?
Human Resource Accounting is a process that identifies and reports investments made in the human resources of an organization that are presently unaccounted for in conventional accounting practices. Essentially, it is an accounting method which aims to reflect the potential value of an organization’s human resources in its financial reports.
Why is Human Resource Accounting necessary?
Human Resource Accounting is necessary because it assists in making effective management decisions, for instance, decisions on personnel, promotion, retention, training and development. It is also helpful in capitalizing on the human resources of an organization.
What are the methods of Human Resource Accounting?
There are primarily two methods of Human Resource Accounting – Historical cost approach and Replacement cost method. The former considers the costs associated with acquiring, developing, allocating, and maintaining human resources, while the latter estimates the cost that the organization would incur to replace its existing workforce.
What are the challenges in implementing Human Resource Accounting?
Challenges in implementing Human Resource Accounting include valuing human resources accurately, changes in human resource value over time, and the lack of a universally recognized procedure for valuing human resources.
How does Human Resource Accounting benefit an organization?
Human Resource Accounting provides a number of benefits including helping in formulating and implementing management strategies, enhancing performance evaluation, aiding in investment decisions, and increasing understanding of human resource costs among others.
Related Entrepreneurship Terms
- Cost-Benefit Analysis
- Employee Retention Rate
- Capital Budgeting
- Intangible Assets
- Workforce Valuation
Sources for More Information
- Investopedia: A comprehensive financial education website that provides a wealth of information on various finance topics, including Human Resource Accounting.
- AccountingTools: A site devoted to offering understanding and clarity about various accounting principles and terms such as Human Resource Accounting.
- AccountingCoach: This website offers free and paid learning materials about different accounting and finance topics, including Human Resource Accounting.
- Encyclopedia.com: An online encyclopedia that provides entries from reputable reference works, explaining a variety of topics, like Human Resource Accounting, in an easily understandable way.
