Importance, Objectives, methods, Limitations of Human

Resource Accounting
Human resource Accounting
is the process of identifying and reporting the Investments made in the
Human Resources of an Organisationthat are presently not accounted for in
the conventional accounting practices. In simple terms, it is an extension of
the Accounting Principles

of matching the costs and revenues and of organising data to communicate

relevant information in financial terms.

Importance of Human Resource Accounting

HRA provides useful information to the management, financial analysts and
employees as stated below:-

1. HRA helps the management in Employment and utilisation of Human

Resources.

2. It helps in deciding transfers, promotion, training and retrenchment of

human resources

3. It provides a basis for the planning of physical assets vis-a-vis human

resources

4. It helps in evaluating the expenditure incurred for imparting further

education and training of employees in terms of the benefitsderived by the
firm.

5. It helps to identify the causes of high labour turnover at various levels and
taking preventive measures to contain it.
6. It helps in locating the real cause for low return on investment, like
improper or under-utilisation of physical assets or humanresources or both

7. It helps in understanding and assessing the inner strength of an

organisation and helps the management to steer the companywell through the
most averse and unfavourable circumstances.

8. It provides valuable information for persons interested in making long term

investments in the firm.

9. It helps the employees in improving their performance and bargaining

power. It makes each employee understand his contributiontowards the
betterment of the firm vis-a-vis the expenditure incurred by the firm on him

Objectives of Human Resource Accounting

1. To furnish cost value information for making proper and effective
management decisions about acquiring, allocating developingand maintaining
human resources in order to achieve cost effective organisational objectives.

2. To monitor effectively the use of human resources by the management.

3. To have an analysis of the Human Asset, i.e. whether such assets are
conserved, depleted or appreciated.

4. To aid in the development of management principles and proper decision

making for the future by classifying financialconsequences of various
practices.

5. It is one of the latest mode of accounting technique

Methods of Human Resource Accounting

There are two approaches to HRA. Under the

cost approach

,also called human resource cost accounting method or model, there is a)

Acquisition cost model and b)replacement cost model. Underthe
value approach

there are a) present value of future earnings method, b) discounted future

wage model, c) competitive bidding model.

Cost Approach

This approach is also called as acquisition cost model. This approach is

developed by Brummet,

Flamholmay tz and Pyle .

This method measures the organization’s investment in employees using the

five

parameters:recruiting,

acquisition; formal training and, familiarization; informal training, Informal

familiarization; experience; and development. This model suggest instead of
charging the costs to p&l accounting it should be capitalized in balance sheet.
The process of giving a status of asset to theexpenditure item is called as
capitalization. In case of human resource it is necessary to amortize the
capitalized amount over a period oftime. so here one will take the age of the
employee at the time of recruitment and at the time of retirement. out of these
a few employee mayleave the organization before attaining the
superannuation. This is similar to a physical asset. e.g.: If company spends one
lakh on anemployee recruited at 25 years, and he leaves the organization at
the age 50, he serves the company for 25 years (his actual retirement age was
55 years). The company has recovered rupees 83333.33 so the unamortized
amount of rupees 16666.66 should be charged to p&l account i.e.