Human resource accounting means accounting for human beings, which constitute the most important resource within any organization. Accounting for human resources involves dealing with the measurement of costs associated with recruiting, selecting, hiring, training, placing, and developing the employees within an organization. It also involves measuring the present economic value of human resources to an organization. This section describes the various methods for calculating the value of human resources in an organization. The American Accounting Association Committee on human resource accounting broadly defines it as the process of identifying and measuring data about human resources and communicating this information to the interested parties. The primary objective of accounting for human resources is not merely to account but also to help the management in planning and controlling the contribution of people to organizations and society at large. Human resource accounting is also expected to improve the quality of financial decisions made both internally as well as externally regarding the functioning of an organization. Information regarding human resources, as well as changes in human resources, may provide the management with valuable aids for monitoring employee efficiency, regulating organizational behavior, reducing absenteeism, and improving relations. Thus, human resource accounting helps in quantifying the service potential of employees in an organization. It also helps in changing the attitudes of management toward their people by viewing them as assets and, in this way, placing a monetary valuation on the services that they will render. Such a change in attitude usually has a major impact on managerial decisions involving human resources. Very few empirical studies have been conducted to analyze the behavioral implications of human resource accounting models on management decisions. The behavioral implications of human resource accounting can be assessed properly only if the results of experiments with human resource accounting systems in organizations are researched and published. Hence, there is a need to demonstrate the benefits of human resource accounting systems before they can be effectively implemented within an organization. The value of an individual to an organization may be defined as the present value of the set of future services that the individual is expected to render during the period they are likely to work for the organization. The determinants of the value potentially realizable from the individual's services (also referred to as the conditional value of an individual) consist of three variables: Examples of the types of factors that influence these variables are the skill and motivation of the employees, the role in question, and the nature of organizational rewards. These variables interact mutually to determine the potential realizable value of an individual, as well as the probability that they will continue to work in the organization. Improving the quality of managerial decisions is the basic rationale for measuring and accounting for the value of human resources in an organization. Human resources data assist in widening the scope of internal decision-making by permitting the consideration of a number of pivotal variables and improving the basis on which such variables are considered. The case for human resource accounting stems from the basic premise that measuring the value of human resources can assist management in recognizing and defining problems connected with manpower management in several ways. Changes in the value of human resources may be used as an indicator of the cost of employee turnover. Assigning people to various organizational roles and tasks is usually decided on the basis of employee efficiency, opportunities for self-development, and the job satisfaction an individual is expected to derive. Therefore, human resource accounting is worthwhile in this respect because it plays an important role in qualifying the variables that need to be considered in the process of allocating organizational roles and tasks.Human Resource Accounting: Definition
Human Resource Accounting: Explanation
Determination of Human Value
Importance of Human Resource Accounting
Human Resource Accounting FAQs
Human resource accounting is an approach to measuring the economic value of humans. This information may be used to improve the usefulness of employee records and enable more effective decision-making, to ensure that job descriptions properly reflect organizational needs and potential rewards, and to enhance overall organizational performance.
Human resource accounting focuses on three variables that influence the amount of economic value which is potentially realizable from an employee’s services. These are productivity, promotability, and transferability. - Productivity accounts for the quality of work actually produced by an individual over time; - Promotability reflects their potential to assume increased responsibility and authority within the organization; - Transferability is a measure of their ability to work in other organizations.
Examples of human resource accounting include quality-adjusted life-years applied to measuring the value of doctors, and measures used by businesses such as return on investment, return on equity, and economic value-added.
Most organizations use human resource accounting to some extent, and many of these organizations also use standard human resource accounting practices. Some employers that do not resort to more formalized means of measuring the value of an individual include those that can rely on lower-level managers for such information as well as those with a decentralized organizational structure.
The primary source for this information is past records of organizational members, including employment and training histories. It may also be compiled by a human resource accounting department or by an external organization such as a consultancy. Other sources include interviews with managers and supervisors who have dealt with individual employees in the past or focus groups with present managers.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
