Companies must know the value of each employee. As the service sector grows, the human workforce of a company assumes much more important than machinery or equipment. It is necessary to know what investments were made in this resource and the returns they earned. Conventional accounting practices don’t provide adequate means to understand accurately how much an organisation has invested in its employees and the earnings they get from them. This is where human resource accounting becomes necessary.
What is Human Resource Accounting?
Human resource accounting is a process by which companies separately account for the amounts spent on human resources. A report on this is submitted to the stakeholders. The costs will include salaries, benefits, recruiting costs, training expenses, taxes, etc. paid for employing people in the company. Calculating these costs can give an accurate picture of where human resources costs are high and where it is within the limit. It will help the company relocate employees to ensure their value compensates for the expenses. It also helps when the company thinks of reducing staff strength.
Human resource accounting has other uses apart from just knowing the expenses incurred by the employees of the company. Budgeting is an important activity for every organisation, and knowing the workforce cost helps to include this in the budget for the year. The company management can also know the impact of employee costs on the total budget. Another use of knowing the worker cost is in knowing the value of each staff member. A value can be assigned to various employee qualities like experience, qualification, skills, etc., compared with their cost.
People who are planning to become human resources management officials can learn more about this exercise in the Post Graduate Certificate Course in Human Resource Management conducted by a reputed institute. One can learn more about this course by visiting our website.
Methods Of Human Resource Accounting
While experts have put forth various models for this process, the two main methods used are cost-based and value-based models.
Cost Based Models
- Historical Cost Model
This human resource accounting model is similar to how companies value their physical assets. In this model, the costs incurred for employees are measured against their expected lifetime in the company. The costs include recruiting, hiring, training and developing the worker. This way, the expenses incurred can be written off against the income earned during the same period. When a staff member leaves the company before the expected lifetime is over, the person’s value is low.
- Replacement Cost Model
Companies using this human resource accounting method calculate the cost of replacing an employee. If a person leaves the company, the cost of hiring a new one to replace the lost person is considered. This is more realistic as the cost is measured against the present financial status of the company. However, the drawback of the system is that no two persons can be considered identical.
- Opportunity Cost Model
It is a model where the value of the employee is calculated as the opportunity to use the same person for another job. It happens when the company transfers the same worker from one department to another. The value increases when the staff member is in demand across various business units of the same firm. But the danger of this model of human resource accounting is that ideological bidding wars could raise or lower a person’s value.
Value-Based Models
- Future Earnings Value Model
In this model, the value of employees is based on their future earnings. But this method is based on an uncertain future and may not provide the correct picture. An employee may leave even before retirement age. There are also chances that the role of a worker might change in the future. Even the performance of people can change over the years.
- Reward Valuation Model
This human resource accounting method is an improvement over the future earnings model. It considers the fact that workers can change roles over the years. The major problem with this model is that one cannot predict the movement of workers across various departments and their role changes. Assigning a monetary value to different roles is only sometimes accurate. Moreover, this model refers only to the individual and ignores the value addition as a person works in a group.
- Valuation As A Group Model
This model considers the value of a person when they are in a group. The person’s impact on the group is also taken into account. It is easier to predict the average loss of employees in a group than to forecast each employee’s lifespan. Here companies calculated the economic value of an individual from the group’s performance. But one of the aspects that the proponents of this model ignored was that one individual could be very strong while the others in the group could be weak.
It is possible to learn the different models of human resource accounting if you attend the Post Graduate Certificate Course In Human Resource Management. Visit our website to get more information about this course and how it will benefit aspiring human resource personnel.
Objectives Of Human Resource Accounting
Know The Cost And Value Of Employees
The main aim of the process is to know the cost and value of human resources in an organisation. It will help to know the impact of human resource expenses and what returns they bring to the company.
Monitor The Use Of Human Resources
Human resource accounting helps a company monitor the value of every employee over time. It also helps in making the best use of the available workforce. Another objective is to justify the cost of hiring and training the employees.
Recording Employees As Assets
This work helps the company to record human resources as an asset in the company’s books. It helps the company consider employees as its biggest assets. Their quality of work has been recorded over the years.
Advantages Of Human Resource Accounting
- Better Human Resource Planning
One of the advantages of human resource accounting is that it helps the top management plan the recruitment and placement of employees in a better way. When the company performs this exercise, every aspect of an employee is recorded. It includes the cost of recruiting, employing and training each person. As the performance is also closely monitored, the company knows the strengths and weaknesses of all workers. The team communicates the information to the top management, who can make better decisions on the use of human resources.
- Enables Better Utilisation Of Human Resources
Human resource accounting assigns a value to each employee. Correct utilisation of each employee is crucial for the success of any organisation. Only in this way can a company ensure productivity and profitability. This exercise provides information about the activities of employees to their managers. It helps them assess if every worker is properly utilising their skills. Managers can use the information and take steps to ensure that the value of every staff member continues to improve over time.
- Helps Provide Timely Training And Development
Conducting the human resource accounting activity helps to know the actual performance of every employee. Inefficiencies of employees can be easily identified using this method. The organisation can find out the areas where training is required to improve efficiency and productivity. It facilitates managers in designing training programs.
Also Read: What Is Human Resource Management System?
- Facilitates Formulation Of HR Policies
HR policies may need to be changed from time to time. Knowing the performance of the employees accurately helps the company make policy changes about promotions, transfers, job environment, etc., periodically. This is very important for keeping the employees satisfied and also attracting the best people for new vacancies.
- Motivates Employees
Human resource accounting gives full details of an organisation’s employees to its management. They are informed about the employees’ performance and help them develop new welfare programmes for them. Employees realise that the company cares for them. This improves the satisfaction of workers in the firm and helps in retaining them. Having happy employees also results in better productivity for the firm. It helps the company achieve its goals.
- Attracts Better Candidates
It is quite evident that companies that practise human resource accounting give the right value to their employees. This makes the workers happy and encourages them to remain loyal and stay in the firm for longer. The company earns a good reputation among others in the same industry. This helps to attract the best hands when new vacancies arise.
- Attracts Future Investors
All companies need to expand, and this may require fresh investments. One of the best ways to bring investors to a company is to assure them of good performance in the future. Human resource accounting analyses and reports on the efficiency of manpower in a firm. These reports bring out the productivity of the employees and the true state of the organisation. Such information is vital to investors as they can understand whether their investments will be safe in the company.
There are limitations in any system. It is the same with human resource accounting too.
Limitations In Implementing HRA
- Incorrect Assumption
Human resource accounting is performed on the assumption that the employee is going to remain in the organisation till the person retires or dies. This is wrong thinking because workers are likely to move from one company to another, even within a short period.
- Dehumanises Workforce
It can cause differentiation among employees. Those who are valued higher by the organisation may feel superior to those who get low values. It can result in jealousy among workers. It is even possible that it will lead to demoralisation and low productivity among the staff members. Employees can also be manipulated based on the values they get.
Also Read: What is an HR Business Partner: The Ultimate Guide
- No Clear Guidelines
There need to be clear guidelines to differentiate between the cost and value of an employee. The present system of valuing the workers in a firm is not perfect. It is not possible to value a human being like any other asset. With such vague guidelines, it is wrong to give high value to some people while others are valued lower. Moreover, the employees may leave the firm at any time, so the valuation method will be wrong. This makes the human resource accounting process an inaccurate one.
- Disputed Measurement Methods
Another grave issue is the refusal on the part of the finance and accounting department about the method used for measuring employees. There are many methods of measurement, and there seems to be no consensus on which one to use. This leaves the process itself inaccurate. It is also not specified how they must be valued and entered into the balance sheets. All these problems further complicate the human resource accounting process.
- Backlash From Trade Unions
A major problem in India is the presence of trade unions and companies need their approval for implementing any new system regarding the workforce. These unions may not agree to the method of valuing different employees of the same company differently. This can lead to problems with the labour unions and result in disruption of work in the company.
Despite the above limitations and challenges, various companies are looking at implementing the system most effectively. It allows companies to use manpower more effectively and profitably. Those who are looking at becoming human resource professionals must look at ways to make this process more effective. Attending the Post Graduate Certificate Course In Human Resource Management will help to learn more about this process. Visit our website and learn what this course teaches you.
Conclusion
Every new system comes with a lot of challenges and difficulties. But if the company is going to benefit from implementing the process, human resource managers must look at ways to put this in place. It doesn’t just benefit the organisations. Employees can also greatly benefit from human resource accounting because it tells them their value. This exercise also helps them get the training that is required to make them more productive at work. It also results in changes in the policies of companies about employees.
More Information:
Key Fundamentals of Human Resource Management
An Ultimate Guide to Developing an Effective HR Strategy
