Human resources accounting is the process of identifying and measuring your organisation’s Human Resources (HR) budget. The term can be slightly misleading, as it implies that HR spending is something to be tracked and analysed like financial or operational expenses. Human Resource Accounting is a broad term that refers to collecting, analysing, and reporting data about employee benefits, compensation practices, and benefits in general.
Human Resources aligned with other organisational functions will focus on different aspects of human resources. Still, all will have a common goal of ensuring their employees have a safe workplace and fair wages. Human Resource Accounting helps companies understand the costs associated with each of these factors to determine better how best to invest in their workforce.
Also Read: What Is Dual Aspect Concept in Accounting?
What is Human Resource Accounting Meaning?
It is easy to define human resource accounting. Human Resource Accounting tracks and manages employees’ costs and values, including performance, compensation, benefits, and training. HR professionals use various tools to track and analyse data, such as employee surveys, performance reviews, and compensation and benefits reports. In addition to tracking employee performance, HR professionals also need to track the performance of the organisation as a whole. For example, HR professionals need to track the success of recruitment and retention efforts as well as the success of initiatives that improve employee morale and satisfaction.
Human Resource Accounting is necessary for any organisation that wants to know how well its employees are performing and how to improve more. In addition to tracking employee performance, HR professionals also need to track the success of recruitment and retention efforts as well as the success of initiatives that improve employee morale and satisfaction.
In order to track employee performance effectively, HR professionals need to use a variety of tools. One important tool is an employee survey. An employee survey is a method for collecting data from employees about their experiences with their employers. Another essential tool is a performance review. A performance review is a method for evaluating an employee’s performance against desired standards. Finally, HR professionals also need to track compensation and benefits reports. A compensation and benefits report is a report that provides information about an employee’s salary, benefits, and other compensation details.
Main Features of Human Resource Accounting:
- Human Resource Management: It involves everything from hiring and firing to training and development.
- Employee Benefits: This includes things like health insurance and retirement benefits.
- Payroll: Includes things like payroll taxes, employee overtime costs, and other expenses related to compensation and payroll processes
- Compensation: Things like salary, bonuses, stock options, and other forms of payment that employees receive are included.
- Human Capital: Includes things like work hours, absenteeism, turnover rates, etc.
- Records Management: This involves everything from keeping track records to tracking equipment usage.
- Benefits Administration: This involves keeping track of benefits provided by employers, such as vacation days or paid time off.
- Recruitment & Selection - This involves recruiting new employees as well as screening job applicants to fit into the organisation’s culture.
Concept of Human Resource Accounting
Human Resource Accounting definition refers to a system of accounting that tracks the financial, human, and non-financial aspects of an organisation’s employees. It is used to measure the effectiveness of an organisation’s human resources strategy and to evaluate the performance of employees. A Human Resource Accounting system should include metrics that measure employee engagement, training effectiveness, and productivity. It should also track employee turnover and absenteeism. The primary purpose of a Human Resource Accounting system is to provide an accurate and reliable record of employee performance. It should also be used to measure the effectiveness of employee training programs and evaluate employees' performance.
The HR accounting process involves the following:
- Identifying and understanding the needs of the organisation and its employees
- Identifying and developing the appropriate human resources
- Implementing effective recruitment, selection, training, development, and compensation programs
- Maintaining an accurate and up-to-date HR system
- Ensuring that all employees are treated equally and fairly
- Maintaining an accurate and up-to-date payroll system
What are the Objectives of Human Resource Accounting?
The objectives of Human Resource Accounting are to provide accurate and reliable information that is used to make informed decisions about personnel, compensation, training, and other HR matters. The following are some key factors that should be considered when conducting HR:
Human Resource Accounting goals include the following:
- It aids the organisation in planning allocated personnel expenditures well in advance, including procurement prices, training expenses, the price for expansion of human possessions, salaries, and so on.
- Human resource bookkeeping is just one of the best means to measure the expenditures done by an organisation on the personnel as well as the exact worth of these resources. All the decisions concerning the workforce, working in a particular organisation are based on the HRA.
- Once the monitoring has entire mathematical details regarding the human possessions of the organisation, they start considering it as a vital part of all their choices. This addition improves the managerial ideology as the organisation becomes clear about the affordable results of the personnel.
- The HRA system helps the administration of any type of organisation to evaluate the employees on the basis of their performance and their criteria and supply them with incentives appropriately.
- In order to estimate the worth of personnel, an organisation has to adhere to certain concepts and treatment according to the standards established by the Human Resource Department.
- In case there are any upcoming changes in the worth of the human properties operating in the organisation, a personnel audit offers an indicator to the authority ahead of time so that appropriate steps can be required to preserve the most beneficial human properties of the organisation.
- It aids the administration in scrutinising whether the readily available human resources are utilised in the most effective feasible means or not, i.e. there must be the optimal application of the labour force. There ought to be no exploitation of workers in the organisation.
Methods of Human Resource Accounting
- Historic Expense: Historical costs are based on actual human resources expenses. There are two types of such expenses: purchase expenses and learning expenses. Training and development expenses are included in the acquisition price. Although this approach is easy to apply, it does not show the true value of human assets.
- Replacement Price: Unlike historical price, which considers the actual price sustained by workers, substitute expense considers the nationwide cost of replacing today's employees.
In order to calculate the replacement price, various kinds of expenditures are considered, both in terms of procurement and price determination. The substitute expense is usually much higher than the historic expense.
- Requirement Expense: Rather than using historic or replacement prices for valuing human assets, some businesses use basic prices just as they do for physical and monetary assets. Based on their hierarchical placements, employees of a company are categorised into different groups for utilising common costs. Every classification of a staff member is dealt with in terms of standard expenses, and their value is determined.
- Present value of future earnings: In this method, the value of future earnings for a number of individuals is approximated as much as their retired life. It is marked down at a predetermined price to acquire the here-and-now value of such revenues. Today's worth of future revenues is used when it comes to financial assets, but this approach does not result in an appropriate measurement of human resources.
- Procurement Cost Approach: A key aspect of this method is the capitalisation of historical costs. The company incurs these costs to improve its business performance. The expenses incurred in employment are capitalised and written off over a period of time. The unamortised portion of the cost has to be written off against the revenue and loss account of the particular year.
- Replacement Cost Approach: Under this technique, one considers how much it costs to replace existing sources as well as, thus, how much it costs to replace a company's current resources. The method also stands for a current market problem. This approach is often repetitive unless the company wishes to replace its current resources. This, too, is a tough approach as frequently the substitute is not identical.
- Present Value of Future Profits Method: The capitalisation of wage technique is another method to capitalise wage income. It involves estimating future earnings up to the employee's or worker's retirement age and marking the worth accordingly to acquire the present value.
- Anticipated feasible worth: The above techniques reviewed thus far are based on price consideration. For that reason, these methods might give information for theoretical objectives but do not mirror the real worth of human assets compared to these techniques.
- Economic Value Method: The economist refers to an asset's current market value as the asset's 'value.' This approach has a number of strengths, but it requires a certain amount of work. First, the future benefits and an appropriate interest (discount) rate are estimated. Then, the present value of future benefits is calculated.
- Competitive Bidding Method: This is also known as the opportunity cost method. Opportunity cost is the tangible benefit of choosing an alternative path. Once HRA has been audited, each bidder's total amount of capital expended is recorded. The return on investment is determined by comparing the dollar amount bid with the amount spent.
Benefits of Human Resource Accounting
Human Resource Accounting is a process that helps organisations manage their human resources. There are many advantages to using HR accounting software, including:
- Assists in Determining ROI - HRA is an accounting system that recognises the expense made on an organisation's personnel. Once the investment is computed, an organisation can quickly calculate the exact ROI by determining the earnings made by the organisation. This will assist in monitoring how much they should spend on the personnel to attain optimum ROI.
- Inspires Employees - Staff members get motivated to enhance themselves once they familiarise their real value in the eyes of the personnel accounting system of the organisation. The amount invested in them will motivate them to boost the output symmetrical to the organisation's financial investment.
- Boosts Process of Choice Making - HRA works as a centre to get information about the actual value of personnel operating in the organisation. This information assists the administration in making appropriate choices regarding organisational concerns.
- Sign of Health of the organisation - HRA functions as an indication of the well-being of any kind of organisation. The quantity of investment made on the personnel of any organisation aids in gauging the amount of revenue that might be gained in the future.
- Assist in Figuring Out the Requirement of Recruitment - HRA reports on the changes in obtaining returns as well as how much expense needs to be made on the manpower of the organisation. If the earnings are high demand for hiring brand-new staff members, and if no earnings are gained, no more employment occurs. These decisions are based on the information given by HRA.
- Ascertains Unfavorable Results of the Programs - HRA system additionally assists in establishing the negative impacts of numerous programs running in the organisation.
- Facilitates Organising and Executing HR Plans - HR policies of an organisation include plans regarding human resources functions such as promotion, training, demotion, transfer etc. Appropriate organisation and implementation of these plans are vital for every organisation's smooth functioning. This feature is controlled by the Human Resource Accounting system of an organisation.
Also Read: Know the Basics of Managerial Accounting
Traditionally, audit practices ignored the value of human resources when considering an organization and treated them as an expense. Staff members' passion is fundamentally violated by such a fundamentally skewed perspective on personnel.
None of these methods has achieved global acceptance because they integrate oppositions, incompleteness, or incapacity. The double-entry concept and other typical accountancy ideas and methods haven't been able to become reality by using these strategies.
Different methods are still needed to determine the actual value of the company's personnel, and also bookkeeping methods have been found to be ineffective for personnel audits.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.