Methods of Human Resource Accounting

Have you heard the first time about the term “Human Resource Accounting”?  In this article, I will let you know all about this. Firstly, let us understand what human resource is and what is accounting? Secondly, how they both work together. What are the methods which are included in it?

Human Resource

The human resource department is the fundamental unit of all the organizations. Human resource refers to the staff that helps the organization in the searching, shortlisting, hiring & in the training of new employees.

The basic goals of HR managers are to find the right man for the right job, making compensation policies for their workforce and also to make the best strategies, a policy,  which leads their organization toward success.

Accounting

Accounting is important for every business because includes the series of action through which financial transactions of any organization is recorded. Accountants analyze all the assets, expenses, profits, and losses of the company and then summarize it in a report form.

Human Resource + Accounting = Human Resource Accounting

Human resource accounting (HRA) is the process of evaluating the cost and value of the staff recruited in the organization. It is the exercise to determine how much investment an organization made in the Human Resource Assets.

The cost of employee training, recruiting, salaries, development, etc. is measured in it then this report is shared with the authorized concerned parties.

Importance of Human Resource Accounting

• Provides value to human resource.
• Beneficial for origination in making decisions regarding training, promotion, retrenchment for employees.
• It is helpful in management principle implementation and decision making by enhancing the financial significance. 
• It is helpful in analyzing employee turnover and taking retaining step to prevent it.
• Human resource accounting important information for organization’s long term investment.

Methods of Human Resource Accounting

From the late 17^th century, many researchers have been working on how to calculate the worth of employees. What are the things to consider if an employee is good or not for business? It has many methods to calculate the cost & value of employees.

HRA Methods

Monetary Measures

Historical Cost Method

This method was developed in 1967 by William C. Pyle. The historical cost approach means the actual cost experienced by the organization in hiring, developing and training of the employees is capitalized over for the useful period of human resources.

The expenses made in all the selection, recruitment, and development of employees is recorded in written form during which human resource will provide the service.

The advantage of this method is it is easy to understand and implement but its disadvantage is it is hard to determine how long employees will carry on his/her job. 

Example:

If an organization hire experienced employee he/she may not require much training & development.

Replacement Cost Method

The replacement cost method was first introduced by Eric, G Flamholtz. In this method, the cost of replacing employees is calculated. It is based on the assumption that it will cost the organization if the current human resource is replaced by new employees having the same talent and experience.

The advantage of calculating replacement cost is in time of inflation it provides more real value. Its disadvantage is it is not always easy and possible to find out the replacement cost of employees.

Example:

It was estimated in a research that the replacement cost of middle-level executive managers is higher 1.5 to 2 times than the current salary employee is holding.

Opportunity Cost Method

Opportunity cost was discussed by Hc Kiman and Jhones. This method evaluates the value of human resources when the employees are used in alternative activities.

Employee’s value depends on his/her opportunity cost, the amount other section are willing to pay for the functionalities of employee working in another section of an organization.

Its advantage is it makes sure alternative allocation of human capital. The disadvantage is it is a doubtful procedure until the optional uses of worker services available in the company are traced out. 

Example:

If organizations take services from employees who provide organization 10% profit is a better opportunity than to take service from employees who less profitable…

Economic Value Method

Economic value method determines the value of employees on the basis of how much they can put a contribution to the organization during the time period employees stay in the organization.

Employee’s payment is estimated and discounted in the form of benefits, salaries, and allowances at the current economic value of employees. The benefit of the economic value method is it considers the employee’s career movements. The disadvantage it is difficult to find out the employee expected tenure in the organization.

Example:

The benefits workers get in return of their efforts toward company success.

Non-Monetary Measures

The non-monetary measures the economic value of human resources relies on ratings and rankings rather than dollar or money terms. It is a behavioral measurement technique.

Expected Realization Value Method

The expected realization value is measured through appraisal technique to value the transferability, promotion, productivity of employees. These are observed through assessments done by managers.

Discounted Present Value of Future Earnings

This method was proposed by Rencis Likert. It includes three variables i.e., casual, intermediate and output. Leadership & style is determined by causal variable, intermediated evaluate the motivation, morale, commitment toward goals. These variables eventually affect the output variable which includes sales, profit, production, etc. 

Conclusion

Thus, human resource accounting is the best method for human resource planning and personnel development. The workforce is an important asset for all organizations. HRA provides effective management practices for the improvement of both employee and organization levels.