Human Resource Accounting Meaning
Human resource accounting is accounting and recognition of expenses related to employees of the organization and involves costs related to recruitment, selection, training, hiring etc.
The objectives of Human resource accounting are as follows –
- Measuring cost related to the human resource of the organization
- Enabling management to properly plan and budget for training and other services for the human resource.
- To ensure proper utilization of resources is done or not.
- Increasing awareness and value about human resources;
- To proper accounting of retiring benefits and other benefits over the service period;
- For efficient and better human resource planning;
- For determining actual cost incurredCost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. by the organization on human resources;
- To determine whether an organization has gained from inputs put on human resources, training, recruitment, and other facilities.
- To aid top management on human resource analysis.
Methods of Human Resource Accounting
The methods of human resource accounting are as follows –
#1 – Cost Approach Method
In the cost approach method, we have two methods –
i) Acquisition Cost Method
In the acquisition cost method, organizations capitalize on all costs related to human resources (like training, welfare, and another cost) of the organization and amortize it in the profit and loss account throughout from appointment till retirement.
ii) Replacement Cost Approach
This method is used to determine whether to keep working or replace the worker. It considers the cost of replacing the human resource or employee. This method also helps in determining whether the appointment of employees is beneficial to the organization or not.
#2 – Value Approach Method
In a value approach, we have three methods –
i) Present Value Method
In this method, the present valuePresent ValuePresent Value (PV) is the today's value of money you expect to get from future income. It is computed as the sum of future investment returns discounted at a certain rate of return expectation. of all future benefits to employees is determined to know whether the organization can afford the cost and can be able to gain in the future from cost incurred on human resources.
ii) Value to the Organization Method
In this method, the most valuable employee of the organization is determined and measured whether the organization is earning premium profits from the services of that employee and helps in finding the value of that employee.
iii) Expense Model Method
This method divides the employees into two categories: Decision-making category and decision execution category, and then determine the actual cost incurred on both categories and determine whether it is beneficial to the organization or not.
#1 – The Lev and Schwartz Model
In Lev and Schwartz model the present value of future benefits to employees is determined on the following assumption –
- Employees are classified into age, skill, and experience
- Average annual earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. of each age group are determined
- Then earnings till the retirement of each group are determined
- Later value arrived of each group is to be discounted with the rate of the cost of capital
- This method only considers the salary and wages of employees and no other benefits
- This method ignores the possibility of employees leaving or other possibilities
#2 – The Eric Flamholtz Model
This model is similar to the Present value model but considers the fact of employees leaving earlier, Voluntary Retirement or Retrenchment or death of the employee, etc.
Assumptions/ Facts –
- Determine the period of working of the employee for the organization.
- Identify the period after which an employee may leave the organization.
- Estimating the value of employees for organization and benefits from it to the organization;
- Applying the present value method and considering the above facts.
#3 – Morse Model
Under this model, the gross value of services to be rendered by employees to the organization is determined. This method includes all benefits to the employees like retirement benefits, gratuity, leave encashment, etc. on proper assumptions and then discounted to know the present value and benefits to the organization.
#4 – Linkert Model
This model considers the non-monetary benefits to the employees by the organization like job satisfaction, productivity, and other non-monetary benefits.
#5 – Organ’s Model
Under this model, net benefits from each employee are calculated and then multiplied with its certain period of working with the organization.
- Formulating Policies and plans for human resources;
- Decisions regarding cost and benefits from human resources;
- Determining the training and development cost;
- Determine or ensure proper utilization of resources.
- Determine the value of human resources and benefits from it.
- Aid to top management regarding cost reduction and planning programs.
- Determining the value of critical employees and benefit from it.
Importance of Human Resource Accounting
- Helps management in employment and utilization of human resources in a cost-effective manner;
- Helps management in deciding promotion, demotion, transfers, retrenchment, and VRS schemes.
- Provide a basis for planning about human resources.
- Helps in identifying key employees and their cost and benefits.
- Aid in making budgets or forecasts.
- Help management in directing employees in improving their performance.
- Managerial decisions can be improved with the help of Human Resource Accounting.
- It helps management to implement the best methods of salary, wages, and overtime administration.
- The system of Human Resource Accounting discloses the actual value of the human resource and its benefit from the same.
- Proper and efficient utilization of manpower resources;
- Productivity can be increased.
- There is no standard procedure for valuing human resources.
- All methods of valuationAll Methods Of ValuationDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company. are based on assumptions.
- The life of working cannot be adequately estimated due to certain factors that are not in the hands of the organization. Hence valuation can be seen as unrealistic.
- Different methods used by various firms in the industry; hence no comparison can be made with the industry.
- Employee turnover is ignored in valuation.
Human Resource is the most critical asset of any organization. The organization will run properly and will be able to stand in the long run because of its efficient human resources. Hence its accounting is vital. Accounting of human resources is based on certain assumptions; thus proper valuation is not possible. There are certain limitations of human resource accounting.
This has been a guide to Human Resource Accounting and its Meaning. Here we discuss methods, objectives, models of human resource accounting along with benefits, limitations, and importance. You can learn more about from the following articles –