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HR accounting.pdf

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HR accounting.pdf

  1. 1. HUMAN RESOURCE ACCOUNTING
  2. 2. MEANING • Human resource accounting is a process of measuring the cost incurred by the organization to recruit, select, train, and develop human assets. • The American Accounting Society Committee on Human Resource Accounting defines it as “Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.”
  3. 3. OBJECTIVES OF HUMAN RESOURCE ACCOUNTING 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. To monitor effectively the use of human resources by the management To have an analysis of the Human Asset, i.e. whether such assets are conserved, depleted, or appreciated. To aid in the development of management principles and proper decision making for the future, by classifying the financial consequences of various practices.
  4. 4. NEED OF HUMAN RESOURCE ACCOUNTING • Formulating policies and programs for the development of human resources. • Decisions regarding cost reduction programs. • Training and development. • Recruitment and selection. • Manpower planning and control. • Conservation and reward of human resources. • Making a choice between various types of human investment and investments in other assets, etc.
  5. 5. BENEFITS OF HUMAN RESOURCE ACCOUNTING The system of HRA discloses the value of human resources, which helps in proper interpretation of return on capital employed. Managerial decision-making can be improved with the help of HRA. The implementation of human resource accounting clearly identifies human resources as valuable assets, which helps in preventing misuse of human resources by the superiors as well as the management. It helps in efficient utilization of human resources and understanding the evil effects of labor unrest on the quality of human resources. This system can increase productivity because the human talent, devotion, and skills are considered valuable assets, which can boost the morale of the employees. It can assist the management for implementing best methods of wages and salary administration.
  6. 6. LIMITATIONS OF HUMAN RESOURCE ACCOUNTING 1. There is always a bone of contention among the firms which method is an ideal one. 2. There are no standardized procedures. So, firms are providing only as additional information. 3. All the methods of accounting for human assets are based on certain assumptions. 4. It is believed that human resources do not suffer depreciation, and in fact they always appreciate, which can also prove otherwise in certain firms. 5. The lifespan of human resources cannot be estimated. So, the valuation seems to be unrealistic.
  7. 7. METHODS 1. Capitalization of Historical Costs Method. 2. Replacement Cost Method. 3. Opportunity Cost Method. 4. Economic Value Method. 5. Standard Cost. 6. Cost-Benefit Method.
  8. 8. CAPITALIZATION OF HISTORICAL COST METHOD • This method is also called an Acquisition cost model • This method measures the organization's investment in employees using the five parameters: recruiting, acquisition, formal training and familiarization, informal training and informal familiarization, and experience and development. • This model suggests that instead of charging the costs to profit and loss (P&L) accoount, it should be capitalized in the balance sheet. • The process of giving a status of asset to the expenditure item is called capitalization.
  9. 9. LIMITATIONS CAPITALIZATION OF HISTORICAL COST METHOD It considers a part of the employees’ acquisition costs and thus ignores the aggregate value of their potential services. It is difficult to estimate the number of years over which the capitalized expenditure is to be amortized. The economic value of human resources increases over time as people gain experience. But in this approach, the capital cost decreases through amortization. This method measures only the cost of the organization but ignores completely any measure of the value of the employee to the organization.
  10. 10. REPLACEMENT COST METHOD • Rensis Likert first developed this approach based on the concept of the replacement cost. • This method measures the cost to replace an organization’s existing human resources. • It indicates what it would cost the concern to recruit, hire, and train, and develop human resources to match the present level of efficiency. • It is more realistic as it incorporates the current value of firms’ human resources in its financial statements prepared at the end of the year.
  11. 11. LIMITATIONS OF REPLACEMENT COST METHOD This method is at variance with the conventional accounting practice of valuing assets. There may be no similar replacement for a similar certain existing asset. It is difficult to find an identical replacement of the existing human resource in actual practice. Consider more subjectivity into the measure. This method may also lead to an upwardly biased estimate because an inefficient firm may incur a greater cost to replace an employee.
  12. 12. THANK YOU

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