ABSTRACT

Human resource accounting (HRA) is an attempt to identify , quantify and

report investment made in Human resources of an organization that are not
presently accounted for under conventional accounting practice. Businesses
which require a considerable creativity or are science-based show a significant
difference between market value and net book value. This difference is for
intangible assets (including human skills). However the Human Resources are
yet to get recognition in Balance Sheet. Businesses are not properly accounting
for it in Books of Accounts .Auditor certifies in his report that balance sheet
shows true position of business in spite of the fact that it is not showing the value
of human resources . Researches in this field have been slow and researchers are
not able to develop a model which are free from major limitations. Major
limitation of existing models is that they are not able to identify two effects on
Human Capital creation which is back bone of accounting. In this article I have
discussed efforts done in this field by researchers and proposed a model for
valuation and accounting of Human resources. This proposed model is not
altogether new model but it is an extension of Lev and Schwartz Model (L&S)
because at one point it uses Lev & Schwartz Valuation principles. it also remove
major weakness of L&S model such as it is able to account for Human Resource
in balance-sheet. This model also encourages employee to achieve high level of
performance.

RAVINDRA TIWARI

Human Resource Accounting-A New Dimension

Introduction-Ram and Krishna, young fashion designers graduated from NIFT

Delhi, jointly started a fashion designing company Ram Krishna Ltd. They were
having flat and machine as business assets worth Rs 800000.They were very bright
graduate and soon they were having many patented designs to company credit. In
company balance sheet assets including patented designs were recorded at Rs
1000000. Multinational companies across world were trying that these two people
should join them and eager to pay lacs of Rs. per month as salary. Ram and Krishna
were concerned that their company was not properly valued because in balance sheet
main asset of company ,Which was their talents , was not reflected. They consulted
many chartered accountants for this purpose. All were having view that presently
there is no method by which human resource asset can be accounted for in balance
sheet. In today’s knowledge world many businesses are facing this problems
.Specially service companies, which are mainly based on special skills of their

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employees, are not properly valued. These special skills and outcome of these skills
can be termed as Intellectual Capital(IC). Unfortunately a measure element of IC -
Human resource (i.e. skills of Human Resource because companies pay for skills of
human resources ) is not accounted for in books. Due to this companies are
undervalued . Human Resource Accounting(HRA) is an attempt to identify ,
quantify and report investment made in human resources of an organization that
are not presently accounted for under conventional accounting practice. The
committee on HRA of American Accounting Association defined HRA as “The
process of identifying and measuring data about Human Resources and
communicating this information to interested Parties”. Human capital can be defined
as the knowledge that individuals acquire during their lifetimes and use to produce
goods, services or ideas in market or non-market circumstances. The necessity of
HRA arose primarily as a result of the growing concern for Human Resource
Management in industry since the sixties of Twentieth centuries. Behavioral scientist
(like R.Likert,1960)concerned with the management of organizations pointed out that
the failure of Accountant to value human resources was a Serious handicap for
effective management. According to Ivancevich and Glueck “Personnel/Human
Resource Management is the function performed in organizations that facilitate the
most effective use of people(employees)to achieve organizational and individual
goals(1)”.Any asset can be effective used when it is properly accounted for in books.
This is also our experience from our personal life that individual can better utilize
cash(Asset) when he/she properly account for it in the form of budget. IC can not be
exception to it. These facts indicate necessity of HRA which is an essential tool of
HRM. However the Human Resources are yet to get recognition in Balance Sheet.
Expenses relating to Human Resources are charged to Current A/c instead of being
treated as investment to be amortized over economic service life with the result that
the magnitude of net income is significantly distorted. CEDEFOP in its discussion
paper beautifully describes necessity of Human Resource accounting by saying “The
focus on HRA has increased both as a general term which puts a value on human
capital and as a means of encompassing alternate non-financial accounting practices.
Potentially, HRA can overcome the rigidity of traditional balance sheets, i.e.
supplement the information provided by financial statements with information on
human capital; improve human resource development; provide information on the
costs and benefits of investments in human capital, etc.” further it says- “It is
important to be aware of the fact that HRA is not only about putting figures on
human capital ;it is also about supporting human

(1)Human Resource Management, Irwin Publications,6th ed.,1995

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resource development / management. It says that businesses which require
considerable creativity, show a significant difference between market value and net
book value. This difference is for intangible assets (including IC) ,because market is
giving great weightage to intangibles but businesses are not properly accounting for it
in Books of Accounts”.( Human resource accounting: interests and conflicts, Jens V.
Frederiksen ,CEDEFOP,October 1998). These things necessitates further researches
in study of HRA .Development of suitable model of HRA for its accounting in
Balance-Sheet is need of hour. I wanted to solve these inconsistencies by proposing a
model for HRA by which human resources can be accounted for in Balance-Sheet. I
have also listed few existing models for HRA valuation.

Literature Review- In view of some experts accounting for intellectual capital is

not possible within framework of traditional accounting methods. “ As long as the
accountancy profession seeks to progress accounting for intellectual capital within the
confines of prevailing accounting theory, the prospects for a successful outcome
appear remote.”( Robin Roslender,2004).Traditional Accounting method is based on
double entries method, but there is always a question that when we hire human
resource Asset what is corresponding credit effect at the time of hiring.
According to many researchers writing off cost associated with human resources as
expenses in one instance in year in which it is incurred is not proper. Steven H.
Appelbaum and Jamie Hood says that in conventional accounting, the costs
associated with human resources have always been treated as expenses and , as such,
have been written off annually in the financial statement, due to this organization’s
employees are not properly accounted for on the balance sheet(Steven H. Appelbaum,
Jamie Hood,1993).This also confirm inconsistency of traditional accounting with
HRA. In my view cost in the form of salary should be debited in the year of payment
itself because it is revenue expenses or in other words it is payment for services
provided by employees in the year but capital costs such as training expenses should
be written off in the expected service period of employee because organization will be
benefited for this period by this cost. According to Hai Ming Chen and Ku Jun Lin
Many companies nowadays derive their competitive advantages mainly from human
capital. However, under generally accepted accounting principles, all human-related
expenditures are treated as expenses, which are deductions of revenues, thus
misleading decision-makers into inappropriate judgments. (Hai Ming Chen, Ku Jun
Lin,2004).
HRA is at its nascent stage. Researchers are brainstorming to value human
resources which is very fundamental stage for study of any asset. Human beings are
very complex entity. Their efficiency varies from time to time. So expressing it in
certain physical measurement is very tough. According to Jan-Erik Grojer and Ulf
Johanson Human resource costing and accounting (HRCA) is a complex and poorly
understood process of accounting. (Jan-Erik Grojer, Ulf Johanson,1998). Researchers
have to evolve universally accepted method to measure its value so that it may

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become possible to calculate return on this asset. Some researchers have tried to give
approaches to measure human resources. But We are not able to evolve a mechanism
that is free from limitations. Various models given by researchers are some of the
efforts in this direction. Chris Dawson describes general issue of prescriptive and
descriptive approaches to management research, and the tensions that exist between
these two approaches and Considers these issues with particular reference to human
resource accounting(Chris Dawson,1994).
Academic world and practical world are complementary for each other. This is
true for every discipline. Scientific theories have been basis for invention of various
equipment which are useful in day to day world. In HRA field educational institutions
should develop measurement models which are useful in practical Business scenario.
Academic research provides important inputs to HRA for industry applications .The
history of HRA illustrates how academic research can generate improvement in
management systems ,what is implications of measuring human capital for financial
reporting and its managerial uses.( Eric G. Flamholtz, Maria L. Bullen, Wei Hua,
2002). Nowadays a totally new discipline Human Resource Auditing is evolving. It is
gaining importance. This is also an academic concept developed to increase efficiency
of human resources for practical purposes. This again proves that academic world is
trying to fulfill gap between theory and practice. According to G.S. Batra The human
resource valuation system cannot be considered to be a complete system of
accounting unless it is followed by an equally competent system of auditing.
Application or use of human resource accounting, therefore, must also be followed by
a separate HR audit to ascertain whether or not the performance of the managers has
been true and fair in the overall interests of the organization they serve (G.S.
Batra,1996).
Human resource management policy as laid down in company publication and
actual practice followed by company are not same in many cases .Main reason for this
can be that there is no proper record for human resources. This again confirms need
for properly developed HRA. Very few companies are trying to value their human
resources. It is practical fact that if we have to utilize asset to maximum possible
extent then we have to maintain proper records for it, which is completely missing in
case of human resources. This also establishes the facts that human resources may be
underutilized to a great extent. The success or failure of every enterprise including
multinational enterprises (MNEs), is based largely on effective utilization of the
entity's resources. . While there is much concern for detailed information about the
physical and financial assets of the entity, managers and accountants tend to ignore or
half-heartedly pursue similar accountability for what are often intangibles .(William
Brent Carper,2000). Attempts are made to probe into the gaps between the human
resource management policies as laid down in company publications and the actual
practices, followed by companies in public and private sector and by multinationals in
India, (Hem C. Jain,1991).But this efforts can fully materialize only with well
developed system of HRA The rise of the “new economy”, one principally driven by
information and knowledge, international competitiveness and changing patterns of

4
interpersonal activities is attributed to the increased prominence of intellectual capital
as a management and research topic(James Guthrie,2001).Increasing importance of
this topic is also driving researchers to do more research on HRA. The measurement
and reporting of intellectual capital has recently attracted a growing interest from
accounting researchers, promoting a lively and far-reaching debate.( Robin Roslender,
Robin Fincham,2001).
HRA can not be divorced from HRM. HRA is essential and useful tool of HRM.
Chris Dawson examines The relationship between human resource accounting and
human resource management and try to find out whether HRA is the vehicle which
may bring forward the take over of HRM by the accountancy profession?( Chris
Dawson,1989). In my view HRM and HRA will simultaneously exist because they are
complementary to each other .In fact HRA has been developed so that Human
resource manager may take informed decisions. So these fears are unfounded that
accountancy profession will take over HRM.HRA will help in maturity of HRM.
According to Flamholtz and Eric G. Human resource accounting is a managerial tool
that can be used to gain valuable information by measuring the costs of recruiting,
hiring, compensating and training employees. It can be used to evaluate employee
training programs, increase productivity, and improve managerial decision-making
regarding promotions, transfers, layoffs, replacement and turnover(Flamholtz, Eric G
,1999). Tang Tang In his article, developed a heuristic frame addressing the link
between human resource replacement cost and decision-making (Tang, Tang, 2005).
Management strategies including human resource management have evolved over the
centuries in response to economic and social needs of individuals and organizations
(Nash, Claire Y.; Flesher, Dale L.,2005). HRM must be expressed in financial terms'.
senior management and financial managers' support is important for measuring human
resources (Toulson, Paul K; Dewe, Philip,2004).Researches in HRA should be
speeded up for fast development of HRM. Despite a promising outlook in the 1970s,
it has been claimed that human resource costing and accounting have progressed at
something less than snail’s pace over the past two decades. This is largely due to
difficulties in the application of the concept ( Ulf Johanson,1999) so we can not blame
researchers for slow speed of research works. It is complexities of human resources
which makes concept of HRA tough. Researchers have tried their level best to speed
up work .The work of Leif Edvinsson and Skandia in Sweden is interesting .This
seeks to measures and evaluate "soft " assets which would not normally find their way
into the shareholders annual report.( Edvinsson L. and Malone ,Harper, 1997 ). In
order to show greater progress, more needs to be done at both the theoretical and
practical level, More research into valuation methods and models, and the practical
implication of these, is needed with the engagement of both human resource and
accounting professionals (Shraddha Verma and Philip Dewe).
With the growing emergence of the knowledge economy, traditional valuation
has been called into question due to the recognition that human capital is an
increasingly important part of an enterprise's total value. This has led to two important
questions: how to assess the value of human capital in addition to an enterprise's

5
 tangible assets and how to improve the development of human capital in enterprises.(
Jens V. Frederiksen,1998) . According to Punita Jasrotia ,While most organisations
can readily give detailed information about their tangible assets like plant and
machinery, land and buildings, transport and office equipment, there is no formal
record of investment in employees. Human assets accounting or human resource
accounting (HRA), which stands for measurement and reporting of the cost and value
of people as organisational resources, is still to become an accepted trend in the Indian
IT industry(Punita Jasrotia,2000). Although academic research on human resource
accounting has been conducted for several decades, specific methods of measuring
HR costs and values still remains largely undeveloped.
According to some authors HRA is somewhat similar to economic discipline.
Human resources is an old field of research in economics, as reflected by accounting
treatments. (Barcons-Vilardell, Carme; Moya-Gutierrez, Soledad, 1999). article by
Kenneth A. Kiase, evaluates the merits of utilizing human resource accounting (HRA)
concepts to account for human resource development (HRD) in the public sector. It
describes the development of the economic theory of human capital and the increasing
recognition of human resources as human assets of public organizations to be
managed and accounted for in a manner similar to capital assets (Kiase, Kenneth
A.,1996).
Different Models Of HRA- Many people pointed out that it is very difficult to
value Human Resources . Since conventional Balance Sheet fails to reflect the value of
Human Asset so it distorts the value of business .In business if any thing is most
important, it is human resource. We see example of many businesses which have been
destroyed or have become insolvent due to uncertainty of environment .In other words
we can say that all conventional assets of business having become worthless, yet
business was revived by exceptional talent of some persons. Auditor certifies in his
report that balance sheet shows true position of business in spite of the fact that it is not
showing the value of human resources .Current world is knowledge based where most
valuable business asset is human being . businesses can be started without single
conventional asset by any talented person on the internet. We need some changes in
traditional accounting in view of these developments .Any field which is not changing
according to need of the world can be out of business .My paper suggests some change
in traditional accounting in view of these requirements.
Different methods has been given for valuation of human resources. Some of these are
1.Behavioral Model
2.Historical Cost Method
3.Replacement cost Method
4.Competitive Bidding Method
5 Standard Cost Method
6 Lev & Schwartz Method
7. Jaggi and Lau Group Valuation Method
In an Indian context, the Lev & Schwartz model has an edge over the other
models, Since the method has been widely adopted by Indian companies such as

6
Infosys, DSQ Software Ltd., Satyam Computers, BHEL and SPIC. it enables the
company to benchmark the performance and the efficiency of their human resources
with others. Lev & Schwartz advocated the estimation of future earnings during the
remaining service life of the employee and then arriving at the present value by
discounting the estimated earnings at the cost of capital. The assumptions in this
method are realistic and scientific. The method has practical applicability when
availability of quantifiable and analyzable data is concerned, But this model is unable
to give any method to record the value of human resources in the Books of Accounts.
Arguments in favour of Lev & Schwartz Model-In this model wages and
salaries are taken as surrogate for value of human assets and therefore it provides a
measure of future estimated cost .So this model gives somewhat realistic assessment
of value of human resources. According to economic theory ,the value of an asset to a
firm lies in the rate of return to be derived by the firm from its employment, Lev and
Schwartz model surrogated wages and salaries of the employees for the income to be
derived from their employment. They felt that income generated by the workforce is
very difficult to measure because income is the result of group efforts of all factors of
productions.(ICAI, Final Study Module,2002)
Limitations of Lev & Schwartz Model-Following are some of the limitations
of Lev and Schwartz Model (ICAI, Final Study Module,2002)-
1.This model doesn’t suggest how value of human resource should be recorded in
Books of Accounts .
2.This model takes wages & salary as a basis of value of human resource but value
of human resource is not limited only to the extent of cost incurred on them .It is
different from traditional fixed assets .It has greater value than cost incurred.
3 It ignores the probability that people may make role changes during the career.
For example Assistant Manager will not remain in the same position throughout his
expected service life in an organization.
4.The Model ignores the possibility and probability that individual may leave an
organization for reasons other than death or retirement. The model’s expected value of
human capital is actually a measure of expected ‘conditional value’ of a person’s
human capital-The implicit condition is that the person will remain in organization
until death or retirement. This assumption is not practical.
5.A person’s value to organization is determined not only by the characteristics of
the person himself(as suggested by Lev and Schwartz) but also by the organizational
role in which the individual is utilized. An individual’s knowledge and skill is
valuable only if these are expected to serve as a means to given organizational ends.
Proposed Model-. This model can be broadly categorized for two types of
Employees.
1.Method for employee who are whole sole for organization such as MD ,CEO
etc.
2.Method for employees who are not whole sole for organization .

7
 Valuation should contain three parts in both methods which are as follows
1 Real Capital Cost part
2.Present value of future salary/wages payments
3.Performance evaluation part
Total value of Human Resource will be total of above three parts.First two part will be
same for both method. Valuation for second part will be according to Lev and
Schwartz method (although method to account for it in books has also been
suggested).Third part is different for both methods and reflects performance (beyond
normal) for that employee. For normal performance first and second part is sufficient.
1. Real Capital cost-All capital cost such as training cost should be capitalized
by entry
Human resource Capital (HRC) Dr
To Cash/Bank
This should be written off equally in estimated service period by entry
P&L A/C DR
To HRC
At the time of leaving/death of employee whole amount should be charged to P&L
A/C
2. Present Value of future salary/wages payment-As already discussed valuation
in this part is similar to Lev and Schwartz model. Only new thing is that journal
entries and method for accounting for it in books have been proposed-
1. At the time of capitalizing value of human resource according to Lev & Schwartz
valuation (whether at the year end or at the during year, whenever we hire human
asset or company want to begin accounting for human asst
HRC A/C Dr
To Human Resource Reserve (HRR) A/C
2. At the time of salary payments
Salary A/C Dr
To Cash
3. At the year end we should calculate HRC value according to Lev & Schwartz
model. Now difference of HRC in books and HRC now calculated shall be debited in
the form of HRR and balance amount should be debited in P& L A/C to close salary
A/C.
HRR A/C Dr
P&L A/C Dr
To Salary A/C
If difference is more than salary then balance should be credited to P&L A/C
4. Now amount debited in HRR should be charged in form of
depreciation/amortization from P&L A/C
P&L A/C Dr
To HRC A/C

8
 At the time of leaving/death of employee whole amount of HRC should be charged
from P&L A/C and at the same time Whole amount of HRR should be credited to
P&L A/C.
Third part performance evaluation part is different for both methods. This is
obviously due to different performance evaluation criteria between both methods.
Here performance above the normal one has been considered. First and Second part is
sufficient for normal one. This part is as below-
3. Performance Evaluation Part
A. First Method-Method for employee who is wholesale for organization such
as M.D.,CEO etc.-At the end of year classify Sales/Revenue generated into two parts
(I) Normal Revenue
(II) Extra Revenue (which is generated due to extraordinary talent of that
employee)
Calculate Net Profit after all expenses (including CEO/MD remuneration)
attributable to extra sales/turnover/revenue and it should be transferred to Fund for
HRC at some % (say 10 to 15% on this profit). At the same time with the same
amount a capitalization entry should be passed to capitalize Human Resource by
simultaneous transfer to Human Resource adjustment A/C. Human Resource
Adjustment A/C is just like HRR A/C and reflects revaluation of Human Asset on
showing better performance but as this part should not be amortized and should
increase with exhibiting good performance so it has been credited to separate Human
Resource Adjustment A/C. At the time of leaving/death of employee reverse entry
should be passed.

Suggested Use of fund for HRC-

Fund for HRC should be used only for some specific purposes such as
1. Training of Employees
2. Writing off of abnormal losses caused Due to leaving/death of employee
3. Welfare of Employees so that they may be more satisfied
Entry for transferring will be
P&L A/C DR
To Fund for HRC

Entry for capitalization of human resource with the same amount will be
HRC A/C DR
To Human Resource Adjustment A/C
In case abnormal losses generate for many years after leaving/death of
Employee these losses can be written off from this fund over these years. Entry will
be
Fund for HRC DR
To P&L A/C
Reverse entry at the time of leaving/death of employee will be
Human Resource Adjustment A/C DR

9
 To HRC A/C
Amount capitalized in previous year (in this part) should be basis for incentive for
current year.
B. II Method
This is for employees who do routine work and are not whole sole for organization.
If employee has shown any extra performance than normal one then market value of
that extra one should be decided. We should then decide net profit attributable to this
extra one. This should be decided on the basis of % of net profit on sales/revenue and
some % of net profit say 20-30% should be transferred to fund for HRC from P&L
A/C. At the same time with the same amount Human Resource Asset should be
capitalized by debit to HRC A/C and credit to Human Resource Adjustment Account
(This is revaluation of human resource asset on showing better performance). At the
time of leaving/death of employee reverse entry will be passed. Fund for HRC can be
utilized for previous mentioned purposes. Amount capitalized in previous year in this
part should be basis for performance incentive in current year.

Case Study- A Ltd. Wants to begin accounting for human resource. At present
Company has an MD, a manager and a clerk. We assume that company previously has
incurred no capital expenses on human resources but now it intends to send its
employees on training program .Company incurs 10 lacs for MD ,4 lacs for manager
and .5 lacs for clerk for training program .This year sales was 10000 Lacs. It is
estimated that according to general condition of industry 7000 Lacs sales is normal
.Extra sales is due to extraordinary talent and effort of MD. Net Profits on sales
(before debiting P&L for Fund for Human resources) after debiting remuneration for
all employees (including MD) is approximately 20% on Sales. On an average in this
industry MD works in a company for 3 years & other employee works for 6 years
1. First Part-Entry For MD,
HRC A/C DR 1000000
To Bank 1000000
(Being training expenses paid and amount capitalized)
Assumed MD has worked for 1 year so he will work for approx. 2 years .Therefore
provision per year for this expense will be 500000 Rs.
P& L A/C DR 500000
To HRC 500000
(Being training expenses amortized)
Entry for Manager will be
HRC A/C DR 400000
To Bank 400000
(Being training expenses paid and amount capitalized)
Assuming manager has worked for 4 years so he will work for approximately 2
further years. So amortization per year will be 2 Lacs
P&L A/C DR 200000
To HRC 200000

10
 (Being training expenses amortized)
Entry for clerk will be
HRC A/C 50000
To Bank 50000
(Being training expenses paid and amount capitalized)
Entry for amortization will be (taking same assumption as in case of manager)
P&L A/C 25000
To HRC 25000
(Being training expenses amortized)
2. Second Part- Employee Age
MD 30
Manager 40
Clerk 50
For the sake of simplicity we assume Average Annual Earning for all employee
(including MD) during age 30-39 years- Rs. 3000, during 40-49 years- Rs.4000,
during 50-54 Years- Rs.5000.
We will apply 15% discount factor. Retirement age has been assumed as 55
Years.(Here we are not taking expected service period on the assumption that anyhow
we have to pay salary for replacement also which is generally not low than previous
person)

Calculation of Present value of earning of employees at beginning of year

Age 30 Year
Present Value
Rs 3000 p.a. for next 10 years 15057.00
Rs 4000 p.a. for years 11-20 4960.00
Rs 5000 p.a. for years 21 to 25 1025.00
___________
21042.00
___________

Age 40 Year
Present Value
Rs.4000 p.a. for next 10 years 20076.00
Rs.5000 p.a. for years 11-15 4140.00
_________
24216.00
_________
Age 50 Year
________
Rs 5000 p.a. for next 5 Years 16760.00
________

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Total Value of II part of HRC =21042+24216+16760=62018 Rs

Salary payment this year = 3000+4000+5000=12000 Rs

Calculation of Present Value of earning of employee at end of year

Age 31 Year
Rs 3000 p.a. for 9 years 14315.00
Rs 4000 p.a. for 11-20 years 4960.00
Rs 5000 p.a. for 21-25 1025.00
________
20300.00
________
Age 41 Year
Rs 4000 p.a. for 9 Years 18426.00
Rs 5000 p.a. for 11-15 Years 4140.00
________
22566.00
_________

Age 51 Year
_________
Rs.5000 p.a. for 4 years 14275.00
_________

Total value of II part of HRC at end of year =20300+22566+14275 =57141 Rs

Difference in II part of HRC value between year beginning and end =62018-
57141=4877 Rs

Journal Entries-
1. HRC A/C Dr 62018
To HRR 62018
(Being amount capitalized towards HRC)

2. Salary A/C Dr 12000

To Bank 12000
(Being salary paid)

3. HRR A/C Dr 4877

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 P&L A/C Dr 7123
To Salary 12000
(Being amount of salary charged to HRR and P&L A/C)

4. P&L A/C Dr 4877

To HRC 4877
(Being depreciation charged on HRA)
Word of Caution-Currently Lev and Schwartz model is followed by many
companies but it is only followed for internal decision making purposes and
accounting is not done for this model. So stress is not on calculation of accurate
figures for example companies normally assume that all 30-39 age group employees
are just 30 years old and so on for other age groups and calculation is done
accordingly but if any company want to apply these journal entries then it can do
accounting successfully only when accurate age of employees are taken. So it will be
somewhat cumbersome process but with the help of software this problem can be
solved and benefits will be much more because HRC will be now accounted for in
books.
3. Third Part- Method for CEO/MD

Extra sales is 3000 Lacs on which net profit @ 20% will be 600 Lacs. 11% (assumed)
of 600 Lacs will be 66 Lacs
P&L A/C Dr 66
To Fund for HRC 66
(Being amount provided for fund for HRC)
Now simultaneously a capitalization entry for this amount will be passed to record
HRC in Books
HRC A/C Dr 66
To Human Resource Adjustment A/C 66
(Being amount capitalized towards HRC)
This is just like revaluation entry. This capitalization value will be basis for incentive
payment for CEO/MD in next year. I think turnover of CEO/MD will be discouraged
due to this procedure. Second thing, as net profit after CEO/MD computation is being
taken as basis for capitalization so it will not be in overall benefit of CEO/MD to take
very high compensation as his next year compensation will be adversely affected.
Nowadays debate is going on in media over unreasonable high compensation of CEOs
.I think this problem can be solved with this type of incentive payment.
Method for other employees-Assumed market value of normal performance by
manager is manager is 1 Lac and market value of extra performance is .25 lac .Net
profit attributable to this extra performance at the rate 20% is .05 lac of which we are
capitalizing some % say 30%.i.e. we are capitalizing .015 lac .Entry will be
P&L A/C DR 1500
To Fund for HRC 1500
(Being amount provided for fund for HRC)

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 HRC A/C DR 1500
To Human Resource Adjustment A/C 1500
(Being amount capitalized towards HRC)
If Market value for normal performance for clerk is 10000 Rs and for extra one it is
5000 Rs. Net profit attributable to this extra one will be @20% will be 1000 Rs of
which we can capitalize some % say 30% which is 300 Rs. So entry will be
P&L A/C DR 300
To Fund for HRC 300
(Being amount provided for fund for HRC)

HRC A/C DR 300

To Human Resource Adjustment A/C 300
(Being amount capitalized towards HRC)
This third part can be excluded for lower level employee because it can be very
cumbersome process and any other method for performance evaluation or attributable
profit calculation may be used.
Justification for Proposed Model-
1. This model provides both valuation of Human Resources and accounting entry for
them.
2. Valuation has been done in such a way that employees are motivated to achieve
the organization goals. Naturally they will strive for their higher valuation so that next
year they may get incentive for that in next year. Nowadays questions are being
raised over reasonableness of CEOs extraordinary high compensation. This model
prevent CEOs from taking extraordinary high compensation because net profit for this
purpose is decided after CEO compensation which will affect their next year
incentive. So this model balances CEOs compensation package.

3. Value of human resources can be ascertained at any time from Balance-Sheet and
value can be decided for each employees.

4. This model also uses valuation principals of Lev and Schwartz Model. So it also
has strong points of that model

5..This model doesn’t provides depreciation/Amortization on third part of human

resource valuation because it assumes that human resource becomes more and
more valuable on gaining experience and showing good performance(because of
increase in their morale).On the other hand it transfers profits from profit and loss a/c
to Human Resource Fund for meeting unforeseen contingencies and suggest ideal use
of this fund.

6. .It describes the procedure to remove the human resource item from B/S in case
any employee leaves/dies.

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 7. It suggest the use of human resource fund so this can not be used for general
business purposes . It can be used only for employee welfare purposes or wiping off
of abnormal losses due to leaving/death of employee , So it contributes to employee
welfare .Natural consequence of this will be increase in employee productivity . In
this sense it also contributes to moral side of accounting.

8. Basis of Incentive on extra performance over normal performance is valuation of

previous year so it can control on high turnover rate of employees which is major
problem today.
It will be totally wrong to say that this model is altogether new model. I think, it is an
extension of Lev and Schwartz model because Lev and Schwartz valuation principles
also have been used in this model.
Limitations of Proposed Model-Following are some of the limitations of proposed
model-
1. Major limitation of this model is that calculation process is lengthy and
cumbersome. Calculation of Human Resource value for each employee will also be
difficult, But I think this problem can be solved by use of software for this process.
2.Lev and Schwartz valuation principles has been used at one point of time so it may
have some of the weaknesses of that model but major ones of that model have been
removed.

Conclusion- The central problem in HRA is recognition time and procedure of

recognizing human resources. In this aspect proposed model provides some
reasonable basis for recognition time and methodology to recognize it in books of
account. Apart from that there is performance evaluation part which boosts morale of
employee to show extra performance than normal one. This model also provides from
Profit for unforeseen contingencies which protect company from unforeseen
contingencies. This model does not discard Lev & Schwartz model but as a further
step it provides entry for accounting for valuation of that model in books. In this
model capital cost related to employees has been written over expected service life of
employee which is one of the basic concept of accounting. In this model whole of
salary paid to employee has been charged in profit and loss A/C(Some part of it has
been charged as depreciation/amortization of Human Asset, but this model is also
having some limitations such as procedure for calculation can be cumbersome for
each employee. While valuing human assets one should not lose sight of the fact that
human beings are highly sensitive to external forces and human skills in an
organization do not remain static. Skill formation, skill obsolescence or utilization
may take a continuous process. Model proposed by me considers the fact that skills of
employee are directly reflected in revenue of organization so why should not be
Human Resource capitalized on this basis? In this method subjectiveness has been
tried to avoid to the extent possible as actual sales figures has been taken but whole
subjectiveness can not be removed for Human Resource Asset.

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