Human Resource Accounting is a process which involved pinpointing and recording investments put into the human resources of a company but not present in normal accounting practice. It is the process of finding and dissecting data on the workforce and disseminating this data to interested parties.

In simpler terms, it is the term coined to quantify the value and cost of workers to the company they work for. This system involves valuing the worth of workers then recording and systematically presenting the data in the accounts books of a company

Objectives of Human Resources Accounting

Some of the objectives that HR accounting should fulfill include:

  1. Help in monitoring the utilization of human resources
  2. Help in decision making and implementation of management principles by showing the financial significances of various choices and practices
  3. Aid in human assets analysis
  4. To furnish decision makers with cost value information so that decision about acquiring, developing, and training as well as maintaining of human assets can be cost-effective

Methods of Human Resource Accounting

Scholars have been developing methods of calculating an employee’s worth to a company since late 17th century. Several methods have been in use but they all fall under either cost approach or value approach.

  1. Cost approach

Under cost approach, we have two methods:

  • The acquisition cost model – this method involves capitalizing the costs of human recruitment in the balance sheet as opposed to charging it in the p&l statements. The process of value determination involves amortizing the amount capitalized over a time span, such as from when an employee is employed to when he/she retires.
  • Replacement cost approach – this method considers the cost incurred in replacing an employee. It factors in expenses such as recruitment, compensation, selection and teaching costs. This method can be used to determine whether to replace or dismiss the worker.
  1. Value approach

There are a few approaches under this method.

  • Present value(worth) of later earnings – this method determines how valuable a worker’s future input is today
  • Value to the organization – top talents may be fought over by different departments in the same company. The department that has the highest bid should get the employee, and that highest bid is the value of the employee, to be integrated into that department’s investment base.
  • Expense model – this model divides employees into two categories: those that make executive strategic decisions and those who execute those decisions. It then determines the value of an employee by working the: real capital cost, performance assessment and current worth of forthcoming wages and salary payments.