What is Human Resource Accounting?(HRA) Definitions, Objectives, Advantages, Approaches.

  • Post last modified:12 May 2023
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What is Human Resource Accounting?

Human resources accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.

Depreciation Accounting

The most valuable of all capital is that invested in human beings. From social point of view, an enterprise combines two sorts of resources a group of human beings and a group of physical assets.

The latter in isolation of the former is useless. An enterprise with competent persons can take itself ahead despite adverse environment.


Human resources accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties. The American Accounting Society Committee on Human Resource
Accounting for people as an organisational resource. It involves measuring the costs incurred by organisations to recruit, select, hire, train and develop human assets. It also involves measuring the economic value of people to the organisation. Flamhoitz

From the above definitions we may define HRA as the measurement and reporting of the costs incurred to recruit, hire, train and develop employees and their present economic value to the organisation. It involves assessment of the costs and value of the people as organisational resources.

Objectives of HR Accounting

According to Rensis Likert, one of the earliest proponents of HRA system, it fulfils the following objectives:

  • Provide cost value information about acquiring, developing, allocating and maintaining human resources so as to meet organisational goals.

  • Enable management to effectively monitor the use of human resources.

  • Find whether human assets are appreciating or depreciating over a period of time.

  • Assist in the development of effective management practices by classifying the financial consequences of various practices.

To these objectives of HRA, the following may be added:

  • In the decision making process about employment, allocation and utilization of such resources properly. Better decisions about human resources on improved information system can be taken.

  • Better human resource planning, enabling long-term opportunity for planning and budgeting.

  • To attract good, competent and efficient personnel to work for the organisation.

  • In taking decisions regarding promotion, transfer, training, retirement and retrenchment of such resources.

  • For fixing right person for the right job.

  • In evaluating the expenditure, if any, incurred by the organisation in giving further training and to evaluate the return on such investment in human resources.

  • To motivate individual persons in the organisation to increase their worth by training.

  • In planning physical resources vis-a-vis human resources by giving valuable information.

Advantages of HR Accounting

A successful manager can turn the fate of loss making company into the most successful company making use of his skills.The success of any organisation depends upon the material, machinery, money, men and management that are available to it.

Human resource accounting helps in knowing whether human asset is being built up in the business or not. An executive may show good results in producing goods, etc. but he might not have built the human resources properly.

A good manager keeps the morale of his subordinates high so that they contribute their best in achieving the organisational objectives

The following advantages are derived from HRA system:

  1. It throws light on the strengths and weaknesses of the existing workforce in an organisation. This in turn, helps management in recruitment planning, whether to hire people or not. It thus provides useful information about the value of human capital, which is essential to managers for taking the right decisions e.g. choice between
  • Direct recruitment and promotion

  • Transfer and retention and

  • Retrenchment and retention.

2. Management can evaluate the effectiveness of its policies relating to human resources. For instance, high costs of training may indicate the need for changes in policy for reducing labour turnover. Management can also judge as to whether there is adequate return on investment in human resources. HRA provides feedback to manager on his own performance.

3. It helps potential investors judge a company better on the strength of the human assets utilised therein. If two companies offer the same rate of return on capital employed, information on human resources can help investors decide which company to be picked up as an investment. The present law does not require the value of the human asset to be shown in the balance sheet.

4.It helps management in taking appropriate decisions regarding the use of human assets in an organisation that is whether to hire new recruits or promote people internally, transfer people to new locations or hire people locally, incur additional.

Approaches or Methods of HR Valuation

Human resource has never been properly valued. In fact, it was not treated as an asset. The amounts paid as wages and salaries were treated as revenue expenditure and no effort was made to find out the cost of hiring, training and development of human beings.

An effort is now being made by progressive organisations to treat expenditure on human resources as an asset. In the conventional accounting system, the following failures in respect of human resources are worth noting.

The amount spent on the human resources like salaries, wages, training expenses are treated as revenue expenditure, which is not correct. The amount spent on recruitment, training, etc is in the nature of enduring long-term benefit and hence ought to be treated as a capital expenditure.

Management did not have any information about total investment made in the human resources. The failure of conventional accounting to recognise the talents, capabilities and potential of the human resources results in high labour turnover, frustration and despondency among the workers.

Hence there should not be any theoretical objection for valuation of human resources. However, no balance sheet prepared by an accountant shows the human resources as an asset.

A number of methods have been used to measure human resources.

Two questions arise at this stage:

The first question is – How should this asset be measured? Should historical cost method or replacement value method or present value method be used?

The second question is – How should this asset be amortised?

Some of the methods have been discussed here.

Historical or Actual Cost Method

Brummet, Flamholtz and Pyle developed this approach. Under this method, the amount actually spent on the recruitment, familiarisation and development of employees is capitalised and amortised over the period for which the benefits are expected to flow to the organisation.

Outlays, which do not have value beyond the current accounting period, are treated as operating expenses. Costs on recruitment, selection and placement are called acquisition costs while the costs of orientation and training are known as learning costs.

In case the human asset expires before the end of the expected life period or leaves the organisation prematurely, the unamortised cost remaining in the books has to be written-off against the profit and loss account of the particular year.

If the useful life recognised is longer than the original expected life, the amortisation is to be rescheduled.


This method has the following merits

This method follows the traditional accounting concept of matching cost with revenue and this is easy to understand-

The advantage of this method is that the effect of human resource accounting can be shown on conventional balance sheet and profit and loss account, because the information in these statements is also stated on historical cost basis.

It can help the firm in finding out the return on human resource investment.


This method suffers from the following difficulties

  • It is very difficult to estimate the number of years an employee will be with the firm.

  • It is also difficult to fix a rate of amortisation. A number of methods have been devised to write off depreciation on fixed assets but in the case of human assets it will generally be on a constant basis

  • The extent to which employees will utilise the knowledge acquired is also subjectively estimated.

  • It is difficult to determine the number of years over which the effect of investment on employees will be realised.

  • The value of human resources according to this method goes on decreasing every year due to amortisation, but in reality the value of asset increases over the time because of the experience gained by him.

Replacement Cost Approach

This method was developed by Rensis Likert and Eric G Flamholtz. Under this approach the human resources are to be valued at their replacement cost, which is on the basis of the assumption of what cost the firm would incur, if the existing human resources are required to be replaced with others of equivalent talent and experience.

This method can assist the process of manpower planning by providing estimates of the costs involved in obtaining employees for different positions.

Decisions about the quality of the personnel to hire and the training programmes to be arranged for them can be taken into account. Likert‟s determination of the value of total human organisation on the basis of the assumption that a similar organisation is to be created from scratch. Replacement cost can be of two types:

  • Positional Replacement Costs: Are typical in nature and relate to the position and not to the individual who occupies it. e.g., what will be the replacement cost of the position of an HR manager?

  • Personal Replacement Costs: Are related to a particular person. The substitute must be one capable of the same efficiency as person being replaced.

    The replacement cost approach incorporates the current value of the human resource of a firm and hence the financial statements prepared under this method would be more realistic than those prepared under the historical cost approach.


This approach has the advantage of adjusting the human value of price trends in the economy and thereby provides a more realistic value in inflationary times. It has the advantage of being present-oriented.


  • It is very difficult to ascertain the correct replacement cost of a human being, as there can be no complete replacement of a person. Personal prejudices affect the approach.

  • The management may be unwilling to replace the human asset because the present value is greater than its scrap value.

  • It is not always possible to find out the exact replacement of an employee.

  • This method is inconsistent with the historical cost of valuing assets.

  • However, the problem could be solved if all the assets are valued at replacement cost.

  • This method does not reflect the knowledge, competence and loyalties for an „organisation than an individual can build overtime.

  • It is difficult to find out the cost of replacing human resources and different persons may arrive at different estimates.

Chakraborty’s Model or Average Payment Approach

This approach was put forward by Prof S.K Chakraborty. He is the first Indian professor to suggest a model for valuation of human resources of an organisation. In his model, he has valued the human resources on aggregated and not on individual basis.

However, managerial and non-managerial manpower can be evaluated separately. The value of human resource on a group basis can be found out by multiplying the average salary of the group with the average tenure of employment of the employees in that group and shown as Investment in the Position Statement.

The average annual salary payments for next few years could be found out by salary grade structure and promotion schemes of the organisation.

The model consists of the following steps

  • All the employees of an organisation are divided into two groups, managerial and non-managerial.
  • The average tenure of the employment of the employees in the group is estimated on the basis of past experience.

  • The average salary of the group is determined on the basis of the salary wage structure prevalent in the organisation.

  • The human resources values are determined by multiplying the average salary of the group with the average tenure of the employees in that group.

  • The value determined above is discounted at the expected average after tax return on capital employed over the average tenure period to ascertain the present value of the estimated future payment.

According to Prof Chakraborty the recruitment, hiring, selection, development and training cost of each employee should be recorded separately and should be treated as deferred revenue expenditure and maybe written-off over the expected average stay of the employee in the organisation. The deferred portion not written-off should be shown in the balance sheet of the organisation.

Implications of Human Capital Reporting

Human capital reporting helps the various stakeholders in the following ways-

  • Helps the Investors and Public: HRA helps the investors and public by providing the necessary information. Human resource accounting recognises the importance of an individual and thus promotes the intellectual and social growth and thereby facilitates the achievements of economic goals of the organisation.

  • Helps the Management: HRA helps the management in the following ways:

  • For taking decisions: Human capital reporting provides quantitative information about the value of human capital, which helps the managers in taking decisions.

  • For recruitment: It also helps the management to judge the adequacy or otherwise of the human resources and go in for future recruitment if necessary.

  • To re-orient attitudes towards labour: It helps the management to re-orient its attitudes towards labour and improve its leadership styles.

Helps the Employees: In the absence of human capital reporting, the management may not realise the negative effects of certain programmes aimed at improving profits in the short run. Sub-programmes may result in decreased value of human assets due to fall in the productivity levels, high labour turnover, low morale etc.

Controlling Costs of Human Resources

Human resources costs constitute a significant part of the operating costs in many industries. Therefore, monitoring and control of manpower costs have assumed great importance in the modern era of global competition. Some of the approaches used to analyse and control costs of human resources are given below:

Ratio Analysis

In this approach some key performance indicators concerning the HR function are used. These indicators called personnel ratios may relate to the following areas:

  • Cost per recruitment

  • Recruitment cycle time

  • Turnover Rate

  • Cost per trainee.

Cost per Recruitment – Cost of recruitment consists of

  • Cost of time spent by personnel in the recruitment process.

  • Cost of advertisement.

  • Fees paid to recruitment agency.

  • Costs of conducting tests and interviews.

  • Costs of medical examination and

  • Costs pertaining to administration.

The ratio is expressed as follows –

The ratio is expressed
The ratio is expressed

Recruitment Cycle Time: Is the time taken from the beginning to the end of recruitment process. Analysis of the time taken in the recruitment process will help to determine the lead-time required to initiate and complete the process of recruitment. It will also help to reduce the recruitment cycle time.

Turnover Rate: Replacement costs include all costs of recruiting an employee. In addition, interruption in work performance, orientation and ctraining of new employees are additional costs. A cost of labour turnover includes two costs:

Direct Costs: Direct costs include the cost of exit interview and administrative expenses.

Indirect Costs: Indirect costs include the deterioration in motivation and morale of the employees. Turnover rate is expressed as follows:

Turnover Rate
Turnover Rate

Cost per Trainee: It is difficult to evaluate training. Wasteful training costs should be reduced but cost reduction in training should not be at the expense of quality of training. Cost per trainee is expressed as follows:

Cost per Trainee
Cost per Trainee

HR Productivity

It is essential to monitor and improve the productivity of human resources. Human resources have a tremendous potential to improve productivity. Many organisations have considerably cut down idle time, overtime and idle capacity through better utilisation of human resources. Productivity bargaining, technology upgradation, quality circles are some of the techniques through which HR productivity could be increased.

Employee Relations Index

This is a quantitative technique of measuring the overall effectiveness of the total personnel programme. This composite index consists of several strategic items such as absenteeism, separations, occupational health, suggestions, formal grievances, work stoppages, etc. Weights are assigned to each item according to its relative importance.

HR Reports and Budgets

A HR budget is a personnel programme expressed in monetary terms for specified period of time. It covers HR costs like compensation, employee facilities, training and development etc. Comparison of actual costs with budgeted figures will help to decide corrective actions. Reports provide useful information for controlling human resource costs.


What Is Definitions of Human Resource Accounting (HRA)?

Human resources accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.

What Is Historical or Actual Cost Method?

Brummet, Flamholtz and Pyle developed this approach. Under this method, the amount actually spent on the recruitment, familiarisation and development of employees is capitalised and amortised over the period for which the benefits are expected to flow to the organisation.

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