Labour Compliance

Meaning and Concept of Human Resource Accounting

The recent trends in labour laws have led to a drastic shift in the overall perspective of how the workforce should be treated. The employers are more focused on the employees’ productivity and grabbing qualified personnel to facilitate the same. Changes in the quantum of compensation and benefits provided to the employees have impacted the overall human resource cost and the expenses incurred by the organization. The organizations fail to keep track of the same due to the obsolete human resource management approach leading to the growth of Human Resource Accounting in India. However, most organizations cannot use this system optimistically due to a lack of clarity about the procedure.

The article discusses the concept and meaning of Human Resource Accounting to provide a clear view. 

Meaning Of Human Resource Accounting 

Human Resource Accounting refers to the identification, quantification, and reporting of the costs incurred on the HR activities such as recruitment, onboarding, and training & development of the company’s employees. It must be noted that this concept shouldn’t be misinterpreted as the standard accounting involving the analysis of financial and operational analysis as it is a broader concept that includes the collection, analysis, and recording of data with regard to compensation practices, employee benefits, with other general benefits.

Concept Human Resource Accounting (HRA)

Human resources are essential assets of an organization and should be regarded as such, according to the Human Resource Accounting (HRA) principle. HRA entails putting the worth of human resources into monetary terms so that choices about hiring, retaining, and developing people can be made with knowledge. It acknowledges that the value of human resources depends on their knowledge, skills, talents, and experience in addition to the cost of employing and developing them. Human resources’ intangible assets are frequently the most important components of an organization’s success. A systematic strategy is utilized by HRA to quantify the value of human resources, and this technique includes measuring the value of human resources, identifying the pertinent costs and benefits related to them, and presenting this data in a way that can be used to make educated choices.

To provide a complete picture of an organization’s performance, HRA is frequently combined with other performance indicators. The popularity of HRA has grown recently as businesses realize how crucial human resources are to accomplishing their strategic objectives. Organizations may more effectively manage their resources, make wise decisions, and promote long-term success by calculating the worth of their human resources. Measuring the potential future worth of human resources is just as important as their existing value.

Organizations may raise the quality of their human resources and increase future value by investing in employee training and development.

Characteristics of Human Resource Accounting

The following are some characteristics of human resource accounting (HRA):

• Valuing human resources: The process of valuing human resources (HRA) entails calculating the worth of each employee’s knowledge, abilities, and experience. Numerous techniques, such as evaluating the economic worth of their contributions or determining the cost of hiring new personnel, can be used to do this.
• Cost tracking: HRA entails keeping track of the expenses related to managing human resources, such as hiring, training, and remuneration. This can assist businesses in finding opportunities to save expenses and boost productivity.
• Investment analysis: HRA may be used to evaluate the effectiveness of human resource management strategies, including initiatives for training and development. This can assist organizations in evaluating the efficiency of various procedures and choosing how to deploy their resources.
• Decision Making: Determining the ideal amount of employment, identifying areas for employee performance improvement, and gauging the effects of adjustments to pay and benefits are just a few examples of the decisions that HRA can support with helpful information.
• Reporting: As part of HRA, reports that enumerate the worth of human resources and the expenses related to managing them are produced. Managers and executives can utilize these reports as information while making decisions.
• Evaluation of performance: HRA may be used to assess employee performance and the effects of various HRM strategies on worker output and output levels. Organizations may use this to pinpoint areas where staff performance could be improved and create plans to boost productivity.
• Strategic planning: HRA may be used to provide information on the organization’s human resource capabilities and limits to assist strategic planning. In order to fill any possible holes in their human resource capabilities, organizations can use this to their advantage.
• Risk management: HRA may be used to spot possible dangers connected to HRM procedures, such as excessive turnover rates or a shortage of trained personnel. This can assist businesses in creating plans to reduce these risks and guarantee the availability of the essential personnel to meet their objectives.

Advantages of Human Resource Accounting

A procedure called human resource accounting aids in managing the human resources of enterprises. Using HR accounting software has several benefits, including:

• Helps to Calculate ROI: HRA is an accounting method that acknowledges the cost incurred by an organization for its people. An enterprise may rapidly determine the precise ROI after computing the investment by determining the organization’s profits. This will help them track how much money they should spend on staff to get the best ROI.
• Inspiring Employees: Employees are inspired to improve themselves once they become aware of their true worth in the organization’s personnel accounting system. Their investment will encourage them to increase output proportionately to the organization’s financial investment.
• Enhances the Decision-Making Process: HRA serves as a hub for information on the true worth of employees working for the company. The administration may make wise decisions on organizational issues using this information.
• Sign of Organisational Health: HRA serves as a barometer for the health of any type of company. Any organization’s level of investment in its employees helps determine how much future income it could generate.
• Help in Determining the Need for Recruitment: HRA provides information on the changes in gaining returns as well as the amount of money that must be spent on the organization’s human resources. If the demand for employing new employees is great and there is no increase in wages, no additional employment takes place. These choices are supported by the data provided by HRA.
• Establishes Unfavourable Results of the Programmes: The HRA approach also aids in identifying the unfavourable effects of several programs currently being implemented inside the firm.
• Promotes the Organisation and Execution of HR Plans: Plans for human resources functions, such as promotion, training, demotion, transfer, etc., are included in the HR policies of an organization. The efficient operation of every organization depends on the proper arrangement and implementation of these strategies. The organization’s human resources accounting system is in charge of managing this functionality.

Objectives Of Human Resource Accounting

Companies must be aware of the objectives of Human Resource accounting in order to gain clarity about the applicability of the same in the organization. The objectives of Human Resource Accounting are enlisted below-

• Measurement of the expenses incurred by an organization on the human resource and the exact value of these resources to facilitate decisions regarding manpower working in a particular organization is based on the HRA.
• Planning an estimated budget for human resource expenses well in advance by the company. The estimation is based on the aspects such as acquisition cost, training cost, the cost for expansion of the human assets, salaries, and wages, etc.
• Improving the managerial ideology of the organization and gaining clarity about the economic effects of human resources.
• Assessing the employees based on their performance to incentivizing them in accordance with the same.
• Estimating the value of human resources in an organization by following the principles and procedures as per the standards set by the Human Resource Department.
• Indicating to the authority in advance to take appropriate steps to preserve the most valuable human assets of the organization In case of any upcoming changes in the value of the human assets working in the organization.
• Scrutinise if the available human resources are being utilized in the best possible way or not to ensure the optimal utilization of the workforce and avoid exploitation of labour in the organization

What Is The Process Of Human Resource Accounting? 

Companies need to be aware of the process of HRA to ensure that it provides the desired results. The process of Human Resource Accounting is explained below- 

Ascertaining the goals of Human Resource Accounting 

Every organization needs to ascertain the goals of Human Resource Accounting, such as calculation of costs, analysis of employee performance, or any other as per the needs of the organization as they form the foundation for such accounting.

Selecting the Method of Human Resource Accounting

After ascertaining the accounting goals, the organization must select the method of Human Resource Accounting, which can provide the most accurate analysis per the organization’s goals, for which the organization has the liberty to choose more than one method required. However, the validity and consistency of the opted method should be checked before proceeding with the implementation of the same.  

 Collection of Data 

Next, the organization’s HR department must collect the relevant data for computation of the Human Resource Accounting, which may include employee details, a time management sheet, the cost of each employee working in the organization, and physiological factors, to name a few.  

Analyzing the Data

The collection of data must be followed by the analysis of the same as per the goals of the company such as the performance of the employees can be analyzed on the basis of their productive hours, the budget of the company can be analyzed based on the expenses incurred on HR activities being certain examples of the importance of analysis of data.

Reporting the Data 

The final step in the process of Human Resource Accounting is the reporting of data collected and analyzed by the HR Department. The data helps the organization make significant decisions regarding the further plan of action for the organization, which can facilitate the growth of the business.

Conclusion

Human Resource Accounting can significantly contribute to measuring the overall costs incurred on the organization’s human resources. The organization needs to have a thorough knowledge of this concept to ensure accuracy in such accounting, which can help the relevant authorities formulate a better plan of action for the growth and development of the organization. It is suggested that the organization get in touch with management experts.

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