Human Resource Accounting: Definition

Human resource accounting means accounting for human beings, which constitute the most important resource within any organization.

Accounting for human resources involves dealing with the measurement of costs associated with recruiting, selecting, hiring, training, placing, and developing the employees within an organization.

It also involves measuring the present economic value of human resources to an organization.

Human Resource Accounting: Explanation

This section describes the various methods for calculating the value of human resources in an organization.

The American Accounting Association Committee on human resource accounting broadly defines it as the process of identifying and measuring data about human resources and communicating this information to the interested parties.

The primary objective of accounting for human resources is not merely to account but also to help the management in planning and controlling the contribution of people to organizations and society at large.

Human resource accounting is also expected to improve the quality of financial decisions made both internally as well as externally regarding the functioning of an organization.

Information regarding human resources, as well as changes in human resources, may provide the management with valuable aids for monitoring employee efficiency, regulating organizational behavior, reducing absenteeism, and improving relations.

Thus, human resource accounting helps in quantifying the service potential of employees in an organization.

It also helps in changing the attitudes of management toward their people by viewing them as assets and, in this way, placing a monetary valuation on the services that they will render.

Such a change in attitude usually has a major impact on managerial decisions involving human resources.

Very few empirical studies have been conducted to analyze the behavioral implications of human resource accounting models on management decisions.

The behavioral implications of human resource accounting can be assessed properly only if the results of experiments with human resource accounting systems in organizations are researched and published.

Hence, there is a need to demonstrate the benefits of human resource accounting systems before they can be effectively implemented within an organization.

Determination of Human Value

The value of an individual to an organization may be defined as the present value of the set of future services that the individual is expected to render during the period they are likely to work for the organization.

The determinants of the value potentially realizable from the individual’s services (also referred to as the conditional value of an individual) consist of three variables:

  • Productivity
  • Promotability
  • Transferability

Examples of the types of factors that influence these variables are the skill and motivation of the employees, the role in question, and the nature of organizational rewards.

These variables interact mutually to determine the potential realizable value of an individual, as well as the probability that they will continue to work in the organization.

Importance of Human Resource Accounting

Improving the quality of managerial decisions is the basic rationale for measuring and accounting for the value of human resources in an organization.

Human resources data assist in widening the scope of internal decision-making by permitting the consideration of a number of pivotal variables and improving the basis on which such variables are considered.

The case for human resource accounting stems from the basic premise that measuring the value of human resources can assist management in recognizing and defining problems connected with manpower management in several ways.

Changes in the value of human resources may be used as an indicator of the cost of employee turnover.

Assigning people to various organizational roles and tasks is usually decided on the basis of employee efficiency, opportunities for self-development, and the job satisfaction an individual is expected to derive.

Therefore, human resource accounting is worthwhile in this respect because it plays an important role in qualifying the variables that need to be considered in the process of allocating organizational roles and tasks.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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