“Human Resource Accounting is the process of identifying and measuring data about human resources
and communicating this information to interested parties.” In simple terms, it is an extension of the
accounting principles of matching costs and revenues and of organizing data to communicate relevant
information in financial terms.
Importance of Human Resource Accounting:
Human Resource Accounting provides useful information to the management, financial analysts and
employees as stated below:
1. Human Resource Accounting helps the management in the Employment, locating and utilization of
human resources.
2. It helps in deciding the transfers, promotion, training and retrenchment of human resources.
3. It provides a basis for planning of physical assets vis-à-vis human resources.
4. It assists in evaluating the expenditure incurred for imparting further education and training in
employees in terms of the benefits derived 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-utilization of
physical assets or human resource or both.
7. It helps in understanding and assessing the inner strength of an organization and helps the
management to steer the company well through most adverse and unfavourable circumstances.
8. It provides valuable information for persons interested in making long term investment in the firm.
9. It helps employees in improving their performance and bargaining power. It makes each of them to
understand his contribution towards the betterment of the firm vis-à-vis the expenditure incurred by the
firm on him.
The main objectives of a HR Accounting system are as follows:
1. To furnish cost value information for making proper and effective management decisions about
acquiring, allocating, developing and maintaining human resources in order to achieve cost effective
organizational 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 financial consequences, of various practices.
5. In all, it facilitates valuation of human resources, recording the valuation in the books of account and
disclosure of the information in the financial statement.
6. Further, it is to help the organization in decision making in the following areas:
a) Direct Recruitment Vs promotion.
b) Transfer Vs. Retention.
c) Retrenchment Vs. Retention
d) Impact on budgetary controls of human relations and organizational behaviour.
e) Decision on reallocation of plants, closing down existing units and developing overseas subsidiaries
etc.
Limitations of Human Resource Accounting:
Some of the attributes are:
i) There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human
resources of an organization. The systems which are being adopted have certain drawbacks.
ii) The period of existence of human resource is uncertain and hence valuing them under uncertainty in
future seems to be unrealistic.
iii) There is a fear that HRA may dehumanise and manipulate employees.
iv) For e.g., an employee with a comparatively low value may feel discouraged and develop a complex
which itself will affect his competency to work.
v) The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a tool
of the management facilitates better and effective management of human resources.
vi) In what form and manner, their value to be included in the financial statement is the question yet to
be classified on which there is no consensus in the accounting profession.
vii) As human resources are not capable of being owned, retained and utilized, unlike the physical assets,
there is problem for the management to treat them as assets in the strict sense.
viii) There is constant fear of opposition from the trade unions as placing a value on employees would
make them claim rewards and compensations based on such valuation.
