Human Resource Accounting

INTRODUCTION

1.1 INTRODUCTION

To ensure the growth and development of any organization, its human resources are of utmost importance. Without human resources, two of the other resources cannot be operationally effective. Men, materials, machines, money and methods are the resources required for an organization. These resources are broadly classified into two categories, viz., animate and inanimate (human and physical) resources.

Men, otherwise known as the human resources, are considered to be animate resources. Others, namely, materials, machines, money and methods are considered to be inanimate or physical resources. The success or otherwise of an organization depends on how best the scarce physical resources are utilized by the human resource. What is important here is that the physical resources are being activated by the human resources as the physical resources cannot act on their own.

Therefore, the efficient and effective utilization of inanimate resources depends largely on the quality, caliber, skills, perception and character of the people, that is, the human resources working in it. An organization possessed with abundant physical resources may sometimes miserably fail unless it has right people, human resources, to manage its affairs. Thus, the importance of human resources cannot be ignored.

Unfortunately, till now generally accepted system of accounting this important asset, viz., the human resources has not been evolved. For a long period, the importance of human resource was not taken care of seriously by the top management of organizations. Therefore, at this point, it becomes imperative to pay due attention on the proper development of such an important resources in an organization.

Human resource accounting is therefore, best described as the process of identifying and reporting investments made in the human resources of an organization that are presently unaccounted for in the conventional accounting practices. Therefore, it is basically an extension of the standard accounting principles.

Despite the conventional accounting practices, human resource accounting encourages to measure the cost and value of the people (i.e. of employees and managers) in the organization. Hence, under HRA, the costs incurred in recruiting, hiring, training and developing employees and managers are all accounted for because it is agreed that only the non-accounting aspects of human resources of an organization may provide a poor picture of the profits and profitability of the organization.

Therefore, to aid in the development of management principles and proper decision making, the various financial consequences of various practices are all equally important when it comes to running an organization.

1.2 OBJECTIVE OF THE STUDY

This paper aims to provide a basis for the conceptual framework of Human Resource Accounting. An attempt is made to highlight the following aspects:

• Development of the HRA concept
• Definition and meaning
• Importance of HRA
• Limitations of HRA
• HRA for various professionals
• Human Resource Investment

Furthermore, this paper will convey recommendations based on findings and analysis.

1.3 SCOPE OF THE STUDY

As unconventional as it is, HRA without a doubt has been playing a significant role in the running of businesses. It has been particularly useful in finding out the present economic value of its employees and managers throughout the organizations, which is then conveyed through a report. This report, known as the HRA report, is presented to the top level management, and sometimes the employees, managers and investors, which enable them to make proper and effective management decisions about acquiring, allocating, developing and maintaining human resources in order to achieve the cost effective organizational objectives.

Moreover, HRA is definitely an excellent way of monitoring the effectiveness in the use of human resources by the management, and has been helpful in analyzing the human assets of organizations. Not to mention that in recent times the usefulness of HRA for different professionals, other than just the accountants, has been highlighted.

1.4 METHODOLOGY

The aim of this paper is, quite obviously, to elaborate on the relationship between accounting and human resources, and its implications on the financial information of the organization. The answers to all research questions are either based on web research or literature research. A list of reference has also been prepared for any kind of citation made, in order to prevent plagiarism.

1.5 LIMITATION OF THE STUDY

However, in preparing this paper, I felt like the biggest limitation of this study was the time constraint that we were put through. Given a longer time period, I suppose that I could have dug a little deeper perhaps, and found further dimensions to this topic. Moreover, the topic is one that I had little knowledge of from the beginning, so I might have had a narrow perception of some of the topics covered in this paper.

LITERATURE REVIEW

Human Resource Accounting is the outcome of various research studies conducted in the areas of accounting and finance. Human resource is an asset whose value gets appreciated over the period of time provided placed, applied and developed in the right direction. Till the recent past, organizations took few efforts to assign monetary value to human resource in its accounting practice.

Behavioral scientists initiated efforts to develop appropriate methodology for finding out the value of human resource to the organization. They were against the conventional accounting practice for its failure to value the human resource of an organization along with physical resources. The traditional concept suggested that expenditure on human resource is treated as a charge against revenue as it does not create any physical asset. At present there is a change in this concept and the expenses incurred on any asset (as human resources) should be treated as capital expenditure as it yields benefits which can be derived for a long period of time and could be measured in monetary terms.

The following are the reasons why Human Resources Accounting has been receiving so much attention in the recent years. Firstly, there is genuine need for reliable and complete management of human resources. Secondly, a traditional framework of Accounting is in the process to include a much broader set of measurement than was possible in the past. The people are the most important assets of an organization but the value of this asset yet to appear in financial statements. It does not get included in management information systems too. Conventional accounting of human resources took note of all expenses of human capital formation which does not seem to be correct or meeting the actual needs.