Concept of Human Resource Accounting (HRA)

Introduction: Human Resource Accounting (HRA) is a new branch of accounting. It is based on the traditional concept that all expenditure of human capital formation is treated as a charge against the revenue of the period as it does not create any physical asset. But now a day this concept has changed and the cost incurred on any asset (as human resources) should be capitalised as it yields benefits measurable in monetary terms. Human Resource Accounting means accounting for people as the organisational resources. It is the measurement of the cost and value of people to organisations. It involves measuring costs incurred by private firms and public sectors to recruit, select, hire, train and develop employees and judge their economic value to the organization. HRA is a sophisticated way to measure in financial terms the effectiveness of the personal manager activities and the use of people in an organization. It is process of accounting people as an organization resource. It tries to place a value on the organizational human resources as assets and not as expenses. This method shows the investment the organization makes in the people and how the value of these people change over a time. The acquisition of employee is compared with the replacement cost from time to time. In brief, in this method the employees’ performance is evaluated in terms of costs and contributions of employees.

Meaning: Human resource accounting is an attempt to identify and report investments made in the human resources of an organisation that are not presently accounted for under conventional accounting practice. Basically, it is an information system that tells the management what changes overtime are occurring to the human resources of the business, and of the cost and value of the human factor to the organisation. The system may serve both the internal and external users, providing management (internal users) with relevant data on which to base recruiting, training and other development decisions and supplying investors, lenders and other external users of financial statement with information concerning the investment in and utilisation of human resources in the organization. Accounting is a man-made art and its principles and procedures have been evolved over a long period to aid business in reporting for the management and public. Of the four factors of production, viz., man, money, material and land, the last three of them are amenable to conventional accounting, but the first one, i.e., the human resource has not been subject to such accounting. Over the last two decades the idea of accounting for human resources is gaining active consideration. Much of the work on accounting for human resources focused primarily on development or validation of HRA concepts. The traditional practice of treating all expenditure on human capital formation as an immediate charge against income is not consistent with the treatment accorded to comparable outlays in physical capital. The American Accounting Association strongly criticised the practice of assigning a Zero value to an asset and stated that ‘Costs should be capitalized when they are incurred in order to yield future benefits and when such benefits can be measured.’

Management of any concern continuously strives hard for obtaining maximum efficiency. In order to measure the effectiveness of any firm the normal method is to examine financial statements. These statements include balance sheets in which physical assets such as cash accounts receivables, inventory and plant are recorded. These statements normally do not mention the productive capacity of the workers or goodwill of the company. The following variables do make a firm superior to other firms.

(i) Level of intelligence and aptitude of the personnel.

(ii) Level of training of employees.

(iii) Level of performance targets and motivation to achieve success for the organisation.

(iv) Quality of leadership.

(v)   Capability to use differences for purpose of innovation and improvement.

(vi)  Quality of communication within the organisation.

(vii) Effectiveness of decision-making.

(viii) Ability to achieve cooperative teamwork.

(ix) Quality of control processes.

(x) Capacity to achieve effective coordination.

(xi) Ability to use experience and measurements to guide decisions, improve operations and innovations.

These factors are not accounted for in the balance sheet. Human resources accounting has developed in an attempt to overcome this deficiency. HRA is the art of valuing, recording and presenting systematically the work of human resources in the books of accounts of an organisation. Thus, it is primarily an information system, which informs the management about the changes that are taking place in the human resource of an organisation.

Six main Assumptions of Human Resource Accounting are: 

1. Human resources provide benefits to an organization in a fashion similar to the manner in which financial and physical resources provide benefits.

2. The benefits associated with both conventional assets and human resources have value to the organization because these benefits contribute in some way to the accomplishment of the organizational goals.

3. The acquisition of human resources typically involves an economic cost and the benefits associated with such resources can personally be expected to contribute to the economic effectiveness. It follows, therefore, that these benefits are essentially economic in nature and are subject to measurement in financial terms.

4. Since the usual accounting definition of an asset involves the right to receive economic benefits in the future, human assets are appropriately classified as accounting assets.

5. It is theoretically possible to .identify and measure human resource cost and benefits within an organization.

6. Information with respect to human resource costs and benefits should be useful in the process of planning, controlling, evaluating and predicting organizational performance.”

Benefits of HRA

There are many benefits of HRA accounting which can be explain in following way.

  1. HRA provides the information of total cost of human assets which can use for calculating their benefits for business by comparing it with the benefits provided by employees.
  1. HRA is top work in the field of accounting because in accounting , we includes all physical assets and intangible assets but before making of HRA accounting we are ignoring a very important asset and its name is human being who works in any company or industry.
  1. Human resource accounting is very important where human element is more important than any other factor of production or services. For instance education sector is top sector who human resource accounting must be used for maintaining the accounts of education department.

Measurements in HRA

The biggest challenge in HRA is that of assigning monetary values to different dimensions of HR costs, investments and the worth of employees. The two main approaches usually employed for this are:

1. The cost approach which involves methods based on the costs incurred by the company, with regard to an employee.

2. The economic value approach which includes methods based on the economic value of the human resources and their contribution to the company’s gains. This approach looks at human resources as assets and tries to identify the stream of benefits flowing from the asset.


                Cost is a sacrifice incurred to obtain some anticipated benefit or service. All costs have two portions, viz., the expense and the asset portions. The expense portion is that which provides benefits during the current accounting period (usually the current financial year), whereas the asset portion is that which is expected to give rise to benefits in the future. Arriving at a clear distinction between the two, however, remains an accounting problem even today (Flamholtz, 1999). Two types of costs are of special importance in HRA. These are original or historical cost, and replacement cost. The historical cost of human resources is the sacrifice that was made to acquire and develop the resource. These include the costs of recruiting, selection, hiring, placement, orientation, and on the job training. While some of the costs like salaries, for instance, are direct costs, other costs like the time spent by the supervisors during induction and training, are indirect costs. Sometimes, opportunity cost method, that is, a calculation of what would have been the returns if the money spent on HR was spent on something else, is also used. However, this method is seen to be not as objective as desired. Hence its use is restricted to internal reporting and not external reporting.

The replacement cost of human resources is the cost that would have to be incurred if present employees are to be replaced. For instance, if an employee were to leave today, several costs of recruiting, selection, hiring, placement, orientation, and on the job training would have to be incurred in order to replace him Such costs have two dimensions- positional replacement costs or the costs incurred to replace the services rendered by an employee only to a particular position; and personal replacement cost or the cost incurred to replace all the services expected to be rendered by the employee at the various positions that he might have occupied during his work life in the organization. Though replacement cost method can be adapted for determining the cost of replacement of groups, this method is used essentially to determine the replacement cost of individuals.

Other cost based methods that may be used are the standard cost method and the competitive bidding method. In the standard cost method, the standard costs associated with the recruitment, hiring, training and developing per grade of employees are determined annually. The total costs for all the personnel signify the worth of the human resources.


           The value of an object, in economic terms, is the present value of the services that it is expected to render in future. Similarly, the economic value of human resources is the present worth of the services that they are likely to render in future. This may be the value of individuals, groups or the total human organization. The methods for calculating the economic value of individuals may be classified into monetary and non-monetary methods.

Monetary Measures for assessing Individual Value:

a)  Flamholtz’s model of determinants of Individual Value to Formal Organisations According to Flamholtz, the value of an individual is the present worth of the services that he is likely to render to the organization in future. As an individual moves from one position to another, at the same level or at different levels, the profile of the services provided by him is likely to change. The present cumulative value of all the possible services that may be rendered by him during his/her association with the organization is the value of the individual. Typically, this value is uncertain and has two dimensions.

            The first is the expected conditional value of the individual. This is the amount that the organization could potentially realize from the services of an individual during his/her productive service life in the organization. It is composed of three factors: productivity or performance (set of services that an individual is expected to provide in his/her present position); transferability (set of services that he/she is expected to provide if and when he/ she is in different positions at the same level); promotability (set of services that are expected when the individual is in higher level positions).These three factors depend, to a great extent, on individual determinants like activation level of the individual (his motivation and energy level) and organizational determinants like opportunity to use these skills or roles and the reward system.

The second dimension of an individual value is the expected realizable value, which is a function of the expected conditional value, and the probability that the individual will remain in the organization for the duration of his/her productive service life. Since individuals are not owned by the organization and are free to leave, ascertaining the probability of their turnover becomes important. The interaction between the individual and organizational determinants mentioned above, leads to job satisfaction. The higher is the level of job satisfaction, the lower is the probability of employee turnover. Therefore, higher is the expected realizable value.

b) Flamholtz’s Stochastic Rewards Valuation Model

The movement or progress of people through organizational ‘states’ or roles is called a stochastic process. The Stochastic Rewards Model is a direct way of measuring a person’s expected conditional value and expected realizable value. It is based on the assumption that an individual generates value as he occupies and moves along organizational roles, and renders service to the organization. It presupposes that a person will move from one state in the organization, to another, during a specified period of time. In this model, exit is also considered to be a state. Use of this model necessitates the following information:

1. The set of mutually exclusive states that an individual may occupy in the system during his/her career;

2. The value of each state, to the organization;

3. Estimates of a person’s expected tenure in the organization

4. The probability that in future, the person will occupy each state for the specified time.

5. The discount rate to be applied to the future cash flows.

A person’s expected conditional value and expected realizable value will be equal, if the person is certain to remain in the organization, in the predetermined set of states, throughout his expected service life. The main drawback of this model, however, is the extent of information required to make the necessary estimates of the values of the service states, the expected tenure, and the probability that the individual will occupy the state for the specified period of time. However, if this information can be made available, this model emerges as one of the most sophisticated models for determining the value of individuals.

c) The Lev and Schwartz Model

As mentioned earlier, the Lev and Schwartz model is the basic model employed by Indian organizations According to this model, the value of human capital embodied in a person who is ‘y’ years old, is the present value of his/her future earnings from employment and can be calculated by using the following formula:

E (Vy) =S Py (t +1) S I (T) /(I +R)t –y where E (Vy) = expected value of a ‘y’ year old person’s human capital T = the person’s retirement age Py (t) = probability of the person leaving the organization.



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