Methods of Human Resource Accounting
A human resources accounting (HRA) process seeks to quantify and assess the value of a person’s skills, knowledge, experience, and potential to contribute to an organization’s success. It involves measuring the economic value of the people employed within an organization, taking into account their skills, knowledge, experience, and potential contributions to the organization.
It aims to recognize employees as valuable assets and acknowledge their significant contribution to the performance and sustainability of an organization.
According to HRA, human resources are an essential part of organizational success. The HRA approach examines the value of intangible assets, particularly an organization’s human capital, in addition to tangible assets like machinery and equipment. Organizations can make better decisions regarding human resource management and development if they recognize human resources as assets in financial statements.
Human Resource Accounting uses a variety of methods to value human resources, each with its own unique approach. Let’s explore these methods in more detail:
Cost-based Method:
In the cost-based method of HRA, the organization assesses how much it spent on acquiring and developing its human resources. A cost-based approach includes the recruitment, selection, hiring, and training costs of employees. The key components are:
a. Historical Costs:
This component includes all actual expenses incurred during the recruitment and selection process, such as recruitment agency fees, advertising costs, and interview costs.
b. Training and Development Costs:
This component is responsible for the cost of employee training and development programs such as workshops, seminars, on-the-job training, and other initiatives aimed at enhancing employees’ skills.
In the cost-based approach, recruitment and training expenses are recorded and accounted for, which makes it relatively straightforward. However, critics argue that it only captures the investment made in human resources without considering their potential future value to an organization.