Human Resource Accounting


Everything you need to know about human resource accounting. Human assets accounting or human resource accounting (HRA) stands for the process involving the measurement and reporting of the cost and value of people as organizational resources.

“Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business.

HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organization,” says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India.


Learn about:-

1. Introduction and Meaning of Human Resource Accounting 2. Concept of Human Resource Accounting 3. Need 4. Importance 5. Aspects 6. Approaches

7. Reasons 8. Costs occurred on Human Resource Accounting 9. Models 10. Methods 11. Advantages 12. Limitations 13. Human Resource Accounting in India.

Human Resource Accounting: Meaning, Need, Importance, Approaches, Models, Methods, Advantages and Other Details


  1. Introduction and Meaning of Human Resource Accounting
  2. Concept of Human Resource Accounting
  3. Need of Human Resource Accounting
  4. Importance of Human Resource Accounting
  5. Aspects of Human Resource Accounting
  6. Approaches of Human Resource Accounting
  7. Reasons of Human Resource Accounting
  8. Costs occurred on Human Resource Accounting
  9. Models of Human Resource Accounting
  10. Methods of Human Resource Accounting
  11. Advantages of Human Resource Accounting
  12. Limitations of Human Resource Accounting
  13. Human Resource Accounting in India

Human Resource Accounting – Introduction

Until recently, Human Resource Management (HRM) activities have commonly been evaluated in behavioural and statistical terms. In this competitive climate the need to evaluate HRM activities in economic terms is becoming increasingly apparent. Developing such measures requires an inter-disciplinary approach wherein information from accounting, finance, economics and behavioural science has to be incorporated and delivered in the language understood by the business world.


The next step is to transform generated data into the only language the business world understands money. The need to convert Human Resource Management (HRM) activities in to economic terms has become vital in this competitive scenario. And truly enough HR has also evolved, wherein its functions of hiring, paying salaries, benefit administration, developing and retaining employees, etc., have been translated into quantitative terms in order to monitor results and facilitate changes.

And today the data that is collected as such is being converted to monetary values and thus the emergence of Human Resource Accounting (HRA).

According to the theory of accounting for HR propounded by Flamholtz E.G. – (i) people are valuable resource of an enterprise and (ii) information on the investment and value of human resource is useful for internal and/or external decision-making. According to the suggestions given by Brummer R.L., a firm has to capitalise on its expenditure on HRM functions namely recruitment, selection, orientation, training and development of people and treat them as assets for the purpose of HRA. The amounts so capitalised can be shown in the balance sheet as human assets as distinguished from physical assets.


When we refer to assets, we remember only two assets, viz. fixed assets and current assets. Fixed assets are valued at historical cost basis and current asset at current price. But the growing awareness of the importance of intangibles is also reflected in accounting for assets. There is a widening gap between the perceived value and the accounting value of the business. It necessitated the accounting for intangibles and the accountants have handled several such areas of accounting the intangibles too.

The traditional “bricks and mortar” accounting is of little use in modern business where more than three fourths of value addition is derived from knowledge, an intangible asset. For example, the accounting implications of R & D have been examined and analysis on that has been referred in the financial statements by some of the foreign companies. Earlier accounting theorists like Paten and Scott recognised human resource as an asset and commented that “in a business, well organised and loyal personnel are more important asset than a stock of merchandise”.

Likert first used the term “human asset accounting”, which has been replaced by human resource accounting which demonstrates the weakness of traditional accounting for not bringing human resource within its fold. The process of assigning numeric value to human resources can either be cost based or value based. The cost-based approach includes historical cost, replacement cost and opportunity cost. This approach can be further sub-divided into two categories, that is, non-monetary and monetary.

The non-monetary approach focuses on the organisational and behavioural variables which determine human resource value. The monetary approach focuses on the revenue generation capacity of human resource and attaches a value for accounting. The exponents of human resource valuation models in most cases have not dealt with the mode of recording and disclosure of the accounting information relating to human resources in the financial statements of the organisation.


It is left to the discretion of the accounting bodies that have yet to develop a generally accepted basis for valuation, recording and disclosure of human resource accounting information in the financial statements of an organisation. In most cases, the human resource accounting information is given in the form of supplementary information attached to the financial statements. Prof. N. Dasgupta has suggested, in his total cost approach, the following mode for disclosure of human resources in the balance sheet of an organisation –

According to him, the human resources valued as per his model should be shown both on the ‘assets’ as well as ‘liabilities’ sides of the balance sheet. On the assets side, it should be shown after the fixed assets as Human Assets classified into two parts – (i) value of individuals, (ii) value of firm’s investment. On the ‘Liabilities’ side, it should be shown after the capital as Human Assets Capital by that amount at which it has been shown on the asset side against ‘value of individuals’.

Human resource accounting may be referred to as the process of identifying, measuring and communicating information on human resource in financial terms to assist in human resource planning and controlling human resource costs.

Human Resource Accounting – Concept, Meaning and Definitions

Accounting is a code language used by the accountants to translate business transactions into a definite quantitative framework which can be further interpreted and analysed to derive meaningful qualitative conclusions. Accounting helps in rational decision making as it provides objective information to the decision maker.


Human resource accounting has been defined by the committee on Human Resource Accounting of the American Accounting Association as “the process of identifying and measuring data about human resources and communicating this information to interested parties.”

According to Flamholtz, “Human resource accounting means accounting for people as an organisational resource. It involves measuring the costs incurred by business firms and other organisations to recruit, select, hire, train and develop human resources. It also involves measuring the economic value of people to organisations.” Human resource management’s planning and control functions.

The team and their interrelationships, which corporate managers generally recognise that employees constitute the most important and the most valuable assets and often take decisions involving expenditure which may be justified as investment in human resources, traditional accounting requires such expenses to be charged to income without considering the timing of expected benefits.

Thus, expenditures made for recruiting, engaging, training and developing people are treated as, expenses, and no attempt is made to formulate rules to distinguish between their asset and expense components. It has been increasingly realised that although outlays for human resource have been traditionally conventional foundations of the concept of an asset, and not because of the real nature and timing of benefit that result from such outlays.

Accounting being a practice – engaged in the collection and presentation of economic information to assist a wide ranging decision making process is based on certain rules, procedures and techniques which have evolved over a period of time as a consequence of social, economic, political, legal conditions, restraints and influences. Many managers believe that the accounting function has failed to adjust its objectives and activities to the decision-making requirement of a changing business world.

This belief gets reinforced when one finds that the human resource – but for whose direction and effort “plants, offices, computers, automated equipment and all else that a modern firm was/are unproductive” – find no place in the annual report of a business enterprise just because of the simple reason that the customary accounting system is based on the conventional of monetary valuation and the doctrine of verifiable objective evidence which tritely rule out the ease of accounting for human resources.

The practice of regarding all costs incurred on human capital formation as ‘expired cost’ is conceptually wrong and in assistant with the treatment given to the similar expenditures on physical capital or physical assets. This is done in spite of the fact that the benefits may accrue to the entity not only in that period but in future also.

This treatment is elected because investment in people seen more tenuous than investments in machines, and because there are special difficulties involved in distinguishing between the future benefits of such expenditures and the portion consumed currently. We also have difficulty in thinking of people individually as assets since they are not legally owned by the firm and because of cultural constraints or taboos on the notion of valuing an individual in monetary terms. This view may be countered on several grounds. Human valuation is not concerned with humans per se.

Its primary concern is with the performance of human services. The concept is not concerned with any other activities of the employee services qualify as assets? To resolve this issue, one must consider the economic viewpoint. According to the American Accounting Association, accounting is primarily concerned with events and objects that have economic significance, and this does not necessarily involve legal ownership.

As Sprouse and Moonitz have observed, “the value of assets, indeed their existence, depends upon the future economic services they are capable of rendering to the business enterprise.” Based on the accounting definition of resources, Hendriksen’s view is that there must be a legally enforceable claim to the rights of services of the resources, but this does not mean that the firm must have a formal title or even a formal contract.

Rather, the accountant must rely upon the apparent intent of those who may have all interest in the asset rather than the strict legality of the right. It follows that to be classified as an asset, a resource must have service-potential for the future, extending over more than a year.

All economic theories of value are faxed explicitly or implicitly upon the premise that the attribute determining whether, and to what extent, an object possesses value, is the perceived ability to render future economic ‘utility, benefits’, or ‘services’. Von Mises observed, “Whoever wants to construct an elementary theory of value and price must first think of utility.” To put it differently, if an object is not capable of rendering future economic services then it has no value.

A resource may be defined as an object that possesses expected future services, that is, objects which do not possess expected future benefits cannot, by definition, be resources. Live all resources, people possess value because they are capable of rendering future services. From a macroeconomic viewpoint, the services which people can potentially provide constitute a form of capital. In the same way, people employed in the organisation are resources because they possess expected future service potential.

If the accounting system incorporates the value of a firm’s human resource and its changes over time, the ‘net income’ might be adjusted to reflect changes in the value of human resources. So as to avoid the illusion of ‘Profits’ derived from the liquidation of human resources. Besides, the trends in the adjusted net income figure would also provide an improved basis for the projection of future earnings.

Managerial planning involves search for alternative solutions to problems and evaluation of the alternatives in decision situation. The search for alternatives requires an awareness of the critical nature of all human resources. A conscious recognition of this factor in the development of alternatives can be possible with a regular assessment of the value of human resources.

Likewise, the impact of capital budgeting decisions on human assists is often considered to be a qualitative factor and its critical significance, if not ignored, is not given due importance. Measures of the value of human resources are expected to make a lot of difference in capital budgeting decisions.

Human assets are not included in the asset base used to calculate the rate of return on investment. Human assets are assumed implicitly to be cost free. But human as well as physical assets have opportunity costs associated with their use. This cost needs to be quantified and considered in evaluating alternative proposals.

Evaluation of investments in human capital is generally based on a qualitative assessment of the alternatives. Moreover, investments in human assets are often made without evaluation the expected pay off or return on such investments. The value of managerial training and development programmes is usually taken on faith and expenditure on these accounts is incurred by firms which can afford it with ease, given a high level of profits. Systematic programmes of employee training and executive development obviously need evaluation of the yield or return on the expenditure involved in such programmes.

In the decision models, used in the process of selecting among alternatives, human resource information and changes in the value of human resources over time are important ingredients of decision-making.

For example, if the management has to choose among alternative locations for a new plant, involving transfer of existing employees, it is necessary that a survey of employee attitudes should be undertaken towards the alternative locations and attempt should be made to determine the expected turnover, associated with each location, and the expected cost of turnover calculated. This may be a critical factor in the choice of location for the new plant.

The use of human resource accounting for reporting on actions taken and results achieved may also be of crucial significance in the management control system. Human resource data may include information about the composition of investments in human resources and analysed to determine standard costs of recruiting, firing, training, and developing employees to bring them up to a desired level of competence. Besides, these data may be useful to estimate the replacement costs of filling up various positions.

Replacement costs, in turn, can be used to make budget allocations for investment in manpower, planning and development. In other words, human resource data may provide the basis of setting up a standard cost accounting system for human resource costs, similar to that for manufacturing costs.

Flamtoltz has specifically underlined the primary role of human resource accounting as that of providing information essential for management to perform the functions of acquiring, developing, allocating, conserving, utilising, evaluating and rewarding human resources. The first step in human resource acquisition is to forecast manpower requirements; the management must then translate the manpower forecast into a manpower acquisition budget, which is essentially a process of cost estimation.

HRA can provide measurements of the standard cost of recruiting, selecting and hiring people, for estimate of amounts to be incorporated in the manpower acquisition budget. Again, in making selecting decisions, managers need measurements of the value of candidates for particular jobs, so that the person selected is one who possesses the greatest future value to the organisation.

Instead of using non-monetary measures of potential abilities desired through qualitative tests, the potential economic value of candidates may be a better criterion for selection. Using monetary measurements of the expected value of people, decision rules may be designed to optimise the expected value of the firm’s human resources.

Budgeting for training and development programmes for employees involve assessment of the value of proposed investment in such programmes and estimating the cost of such programmes. HRA can be helpful for decision making, involving the allocation of resources to training and development programmes by measuring the expected rate of return on proposed investments. By providing estimates of the historical and current costs to acquire and develop people for various positions, HRA can also help management to assess the trade-off between the costs of recruitment from outside and development from within.

Allocation of human resources, i.e., assigning people to various organisational roles and tasks, needs to be decided on the basis of the efficiency of the employer, opportunity of self-development and job-satisfaction expected to be derived by the employee. HRA can help qualify the variables required to be considered in the process of allocation expressed in terms of the common dominator of monetary units.

The management may, thus, be enabled also to apply linear programming for an optional solution of the manpower allocation problem. Otherwise, allocation decisions may be costly to individuals as well as to the organisation.

Conservation of human resource is yet another area in which HRA can be can be of great assistance to management, conservation of human resources is the process of maintaining the capabilities of people as individuals and the effectiveness of the human system developed by an organisation. This needs monitoring the effectiveness of the human organisation to assess the extent to which it is being maintained or depleted.

Measures of employee turnover rates, traditionally used to assess the conservation of human resources, are inadequate, first because there are historical figures and, second, because they do not fully reflect the economic impact of turnover. Through monetary measures and reporting of socio-psychological indicators of the condition of human organisation, HRA can help management by providing an early warning system to take law of human resource conservation.

HRA can further help management in the utilisation of human resources effectively and efficiently by providing a conceptual framework, so as to develop strategies with respect of acquisition development, and allocation, designed to influence the value of people. Human resource evaluation involves the measurement of productivity and promotability of people. HRA can be useful in the evaluation of human resources by developing appropriate -methods, including both monetary and non-monetary measurements.

Moreover, human resource valuation can be used for organisational rewards to be administered in relation to an employee’s value to the organisation. Further, the efficiency of personnel management function per se can also be assessed through human resource accounting. The standard costs of acquiring and developing people may be compared with the actual costs incurred for the purpose, and the variances from the standard may be analysed to identify the possible lapses in the personnel management functions.

Human Resource Accounting – Need

The need for HRA arose primarily as a result of the growing concern for human relations management. Industry after the industrial revolutions. The Companies success of failure depend upon HR contribution and attainment of organisational objectives is just impossible in the absence of honest contribution on the part of employees. It is very important to estimate the value of HR in the organisation.

The following points would indicate the need of HRA:

1) H. R. constitutes an important live asset of the organisation, without HR other physical resources cannot be activated but in conventional traditional accounting there is no information is provided about the HR therefore HRA is needed.

2) The measures of the income provided in the conventional statements do not accurately reflect the level of business performance. Conventional Balance sheet fails to reflect the value of human assets and hence distort the value of the firm and the rate of return on investment. Therefore known the real value of HR and the firm HRA and the firm HRA is essential.

3) The Human assets constitute vital part of the total capital, but the value of human assets is ignored in traditional accounting practices therefore the real value. In firm cannot be calculated accurately. That’s why HRA system is needed to calculate the real value of the firm.

4) If the value of human resources is not duly reported in the profit and loss account and balance sheet, the impact of management decisions on human assets of the organisation cannot be clearly perceived.

Why human resource accounting?

Human Resource Accounting is needed for the following reasons:

(i) Human Resource Management is no longer based on philosophy, emotions or beliefs. Organisations invest money and time to improve the quality of human resource. This involves performance management, training and development, motivation, counselling and many other financial benefits. These must be cost-effective. Cost consciousness in human resource management demands for human resource accounting.

(ii) Procedures have now been developed to evaluate the jobs systematically and compare the cost involvement and performance of employees.

(iii) Whether the human resource of the organisation is appreciating or depreciating over a period of time, needs to be analyzed.

(iv) Determining the cost of hiring, maintaining, developing and motivating human resource is important for making the organisation cost-effective.

(v) Human resource accounting provides information for deciding further allocation of funds for investment on human resource.

Human Resource Accounting – Importance

Human Resource Accounting provides useful information to the management, financial analysts and employees as stated below:

1. Human Resource Accounting helps the management in the employment, locating and utilisation of human resources.

2. It helps in deciding the transfers, promotion, training and retrenchment of human resources.

3. It provides a basis for planning of physical assets vis-a-vis human resources.

4. It assists in evaluating the expenditure incurred for imparting further education and training to employees in terms of the benefits derived by the firm.

5. It helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it.

6. It helps in locating the real cause for low return on investment, like improper or under-utilisation of physical assets or human resource or both.

7. It helps in understanding and assessing the inner strength of an organisation and helps the management to steer the company well through most adverse and unfavourable circumstances.

8. It provides valuable information for persons interested in making long term investment in the firm.

9. It helps employees in improving their performance and bargaining power. It makes each of them to understand his contribution towards the betterment of the firm vis-a-vis the expenditure incurred by the firm on him.

Human Resource Accounting – Aspects

Human assets accounting or human resource accounting (HRA) stands for the process involving the measurement and reporting of the cost and value of people as organizational resources. “Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business. HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organization,” says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India.

The current accounting system is not able to provide the actual value of employee capabilities and knowledge. This indirectly affects future investments of a company, as each year the cost on human resource development and recruitment increases. Experts point out that the information generated by HRA systems can be put to use for taking a variety of managerial decisions like recruitment planning, turnover analysis, personnel advancement analysis and capital budgeting, which can help companies save a lot of trouble in the future.

i. Acquisition Costs:

1. Recruiting – Originates with the search for human resources. Included in this is advertising, publicity, mailing etc. Costs corresponding to rejected candidates are applied to the contracted candidates

2. Selection – Corresponds to the selected personnel.

3. Contracting – Begins once the selected personnel is inducted and placed

4. Placing – Includes a variety of administrative costs, produced by the necessity of suiting the new employee to his/her job.

ii. Learning Costs:

1. Training – This is derived from complimentary training for adjusting the candidate with the job. Greatest cost is incurred when the employee is unproductive.

2. Orientation – This is hardly estimable and refers to familiarizing the new employee with the HR policy, products and services of the organization, and the organization in general.

3. Promotion – Originates every time an employee changes his/her job whether in the same category or the other. This normally is a relevant part of the total cost.

4. Improvement – Maintains and improves the real potential capacity of each employee. It forms an important component of the historical costs.

iii. Exit Costs:


Exit costs can be classified into the three categories of lost efficiency prior to separation, job vacancy cost during the new search and termination pay.


It is difficult to put a value on lost efficiency prior to separation. Productivity per employee seems to be the most adequate measure. However, this measure (generally calculated by means of a ratio) is not problem-free. If this loss is expressed according to the productivity ratio, the same problems arise(except for the estimated wasted return percentage that, in this case, becomes unnecessary). Regarding termination pay, accounting normally refers to this as indemnities.

Human Resource Accounting – 2 Important Approaches: Monetary Measures and Non-Monetary Measures

Several approaches for valuation of human resource accounting have been developed.

Broadly, they are:

1. Monetary measures, and

2. Non-monetary measures.

Approach # 1. Monetary Measures:

These measures focus on the value of human resource in economic terms.

These include:

(i) Historical cost of acquisition – The cost of the employee is calculated on the basis of expenditure incurred for recruitment, selection, training and development, etc. The one-time investment on recruitment, selection, induction, etc., is amortized over the expected tenure of the employee whereas the temporary and frequent investments on training and development are amortized over a short period.

(ii) Replacement Costs – This speaks about the cost of replacing an existing employee which includes the cost of recruitment, induction, training and development, opportunity cost in the gestation period till the employee reaches the level of productivity of the replaced employee. This also includes the differential costs in wage and salary.

(iii) Opportunity Costs – When the employee possesses the skill not common but extraordinary and that is needed by the organisation, there will be a bid (offers) to be offered by the organisation reflecting the price of payment to be made to the employee. This bid price is determined based on actual or assumed rate for capitalization of differential earnings.

(iv) Economic Value – Expected future earnings of the employee and the expected productivity are taken into account to calculate the future contributions of the employee. This contribution is discounted with a suitable discounting rate to arrive at the present economic value of the employee to the organisation.

(v) Discounted Present Value of Future Wages and Salaries – Employees are categorized and grouped under age, skill, experience, nature of job, responsibilities, skill/unskilled, technical/non­technical, etc. The present value of future earnings of employees till retirement is taken as the value of human resource.

Although the earnings increase in a geometric progression, the present value is determined by discounting the future earnings in a suitable rate.

Approach # 2. Non-Monetary Measures:

Behavioural scientists suggested a model for measuring changes in the effectiveness of individuals, groups and the organisation. Rensis Likert proposed three sets of variables – causal, intermediate and output – as useful for determining effectiveness over a period of time.

It is a fact that contributory factors (causal variables) like leadership style, commitment to objectives, motivation and morale, etc., affect the output variables like production, sales, profit, etc. Therefore, non-monetary measures need to be measured.

The non-monetary measure used in Human Resource Accounting are:

(i) Expected realisable value, based on skill, ability, attitudes, etc.

(ii) Discounted net present value of future earnings;

(iii) Value of employees based on attitude scores in respect of knowledge, skill, etc., and the annual learnings.

Human Resource Accounting – Reasons why HRA is Required in an Organisation

The Human Re­source Accounting in an organization requires with several reasons.

The main points are as follows:

Internal Reasons:

a. To improve resource management

b. To focus on employees as assets

c. To retain qualified labor force

Internal and External Reasons:

a. To overcome problems arising from the valuation of intangible assets.

b. To redistribute social responsibilities between public and private sectors

External Reasons:

a. To overcome the difficulties in providing sufficient information to investors in traditional balance sheet.

b. To profile the enterprise and improve its image.

c. To attract future employees

Human Resource Accounting – Costs Occurred on Human Resource Accounting

Human resource account­ing aims at depicting the human resources potential in money terms while casting the organization’s financial statements. Any resource will have two sides i.e. its assets value and the cost of procurement; HR is not an exception. But curiously enough in the case of HR, only the procure­ment/maintenance cost is accounted in the balance sheet and not the asset value.

The cost of HR encompasses the following:

Cost of Recruiting – This starts from the time of searching for human resources. It includes the publicity, mailing, rejected applicants and contracted appli­cants.

Cost of Selection – It corresponds to the selected personnel. The components are derived from the candidate’s interview (traveling, lodging/boarding, orga­nization of exams and selective tests).

Cost of Contracting – This begins from the selection of personnel. It includes the cost of formulating the contract, travel and other incidental expenses.

Cost of Placing – It is a variety of administrative costs, necessitated by situating the new employees in their job.

Cost of Training – A greater part of this cost is the salary of the trainee who is unpro­ductive. It hold good for the supervisor’s or the trainers lost time while coaching the employee to do the job correctly. Costs also originate from a decrease in the productivity of the rest of the workers whose jobs are adversely affected by the deficiencies of the new employees.

Cost of Orientation – This cost generally includes adapting the new person to the organi­zation as a whole and to a specific job. The cost of familiarizing the new employee with the personnel policy, products and services of the organi­zation and the organizations in general is hardly estimable.

Cost of Promotion – It originates every time an employee changes his job in the same category or another due to promotion.

Cost of Improvement – This cost is for maintaining and improving the real potential of every employee.

Cost of Substitution – This includes the exit costs of the leaving employee and recruiting and training of the replacement.

Opportunity Cost – It is the estimate of an asset value that is the target of an alternative use.

Exit Cost – This cost covers the lost efficiency prior to separation job vacancy cost during the new search and termination pay.

In addition to the above, the cost of HR includes the following also:

a. Rewards – Cash-like and non-Cash-like Facilities – Tools, Fixtures/ Fittings and accessories at work essential for the welfare of the employees.

b. Health and Safety – Specific policies (Statutory and Voluntary) implementation systems.

c. Consultation and communication overheads

d. Pensions and contributions to social security payments

e. Severance Costs – Retirement, Redundancy and Dismissal

In addition to the above, the cost of HR Includes the following also:

1. Rewards – Cash like and noncash like.

2. Facilities – Tools, fixtures/fittings and accessories at work essential for the welfare of the employees.

3. Health and Safety – Specific policies (statutory and voluntary) implementation systems.

4. Consultation and communication overheads.

5. Pensions and contributions to social security payment.

6. Severance Costs – Retirement, redundancy and dismissal.

Should HR be accounted in the Asset Column?

To set the thing in the right perspective, one school of thought emphasizes the need for incorporating the asset value of HR in the balance sheet.

The two reasons for including the HR in accounting are:

1. People are a valuable resource as long as they perform services that can be quantified.

2. The value of person as a resource depends on how people are employed which is influenced by the management style.

Contrary to the demand of inclusion of HR in the asset column in the balance sheet, the other school of thought right away dismisses the very idea on the contention that quantification of HR is beyond imagination as there cannot be any business without HR. It could be argued that when HR is the ‘Creator’ of all resources, who dares to quantify the ‘Creator’?

HR is not only the foundation of the edifice of business; it is the very ‘Soul and Body’ and ‘Blood and Flesh’ of the business. When one tries to quantify the HR on par with other amounts to degradation of the HR. Above all, quantifying the HR to fit into the rig morale of balance sheet is a Herculean task since HR as an intangible asset changes its value according to the working environment of the business and the management policies.

Human Resource Accounting – Top 3 Models: Present Value of Future Earning Model, Rewards Evaluation Model and Certainty Equivalent Net Benefit Model

1. Present Value of Future Earning Model:

Under this approach, the value of human resources of an organisation is determined according to their present value to the organisation. A number of valuation models have been developed to determine the present value. This model has been developed by Brauch Lev and Aba Schwarts in 1971.

They are of the opinion, that determination of the total of a firm’s labour force is a straightforward extension of the measurement procedure of an individual value to the organisation. They have divided the whole labour force into certain homogeneous groups such as skilled, unskilled, semi-skilled, technical staff, managerial staff etc. and in accordance with different classes and age groups.

Average earnings stream for different classes and age groups are prepared for each group separately and the present value for the human capital is calculated. The aggregate present value of different groups represents the capitalised future earnings of the firm as a whole. They have advocated the use of cost of capital rate for the purpose of capitalising the present value of the future earnings of the employees. According to them, the value of human capital represented by a person of age is the present value of his remaining future earnings from his employment.

They have given the following formula for calculating the value of an individual:

Vr = T E(t) / t: r (1 + r) t – r


Vr = the human Capital value of a person; r years old,

E(t) = the person’s annual earnings up to retirement, represented by the earning profile,

r = discount rate (Cost of Capital),

T = Retirement age.

2. Rewards Evaluation Model:

This model has been suggested by Flanholtz. It identifies the major variables that determine an individual’s value to an organisation, i.e. his expected reliable value. The expected realisable value of an individual is the present worth of future services expected to be provided during the period he is expected to remain in the organisation. The model is based on the presumption that a person’s value to an organisation depends upon the positions to be occupied by him in the organisation. The movement, of people from one organisation role to another is a stochasic process with rewards.

As people move and occupy different organisational roles, they render services to the organisation. However, the roles they will occupy in future will have to be determined probabilistically for each individual.

The model suggests a five steps approach for assessing the value of an individual to the organisation:

1. Forecasting the period will remain in the organisation, i.e., his expected service life.

2. Identifying the services states, i.e., the roles that the might occupy including, of course, the time at which he will leave organisation.

3. Estimating the value derived by the organisation when a person occupies a particular position for a specified time period.

4. Estimation of the probability of occupying each possible mutually exclusive state at specified future times.

5. Discounting the value at a predetermined rate to get the present value of human resources.

This model is certainly an improvement over the Lev and Schwartz. But this model when examined on operational capacity falls short of a practical value in as much as that probabilities will have to be determined for each individual occupying various service states, and these probabilities will have to be determined for all employees for periods on an individual basis.

Further, it will be tremendously expensive way to predict career movements of exit probabilities on an individual basis. Moreover, data developed on the basis will involve large variance which will reduce usefulness of the model. Morse suggested this approach. Under it the value of human resources is equivalent to the present value of the net benefits derived by the enterprise from the service of its employees.

The following steps are involved under this approach:

1. The gross value of the services to be rendered in future by the employees in their individual and collective capacity.

2. The value of direct and indirect future payments to the employees is determined.

3. The excess of the value of future human resources over the value of future payments is ascertained. This represents the net benefit to the enterprise because of human resources.

4. By applying a predetermined discount rate (usually the cost of capital) to the net benefit, the present value is determined. This amount represents the value of human resources to the enterprises.

3. Certainty Equivalent Net Benefit Model:

This approach has been suggested by Pekin Ogan is, in fact, an extension of net benefit approach of morose. Under it, the value of human resources is determined by taking into consideration the certainty with which the net benefits in future will accrue to the enterprise.

The method involves the following steps:

(a) Net Benefit from each employee.

(b) Certainty factor at which the benefits will be available in future.

(c) The certainty equivalent benefits will be calculated by multiplying the certainty factor with the net benefits from all employees. This will be the value of human resources of the enterprise.

Human Resource Accounting – Various Methods of Measurements of Costs and Valuation of Human Resources

The various methods of measurements of costs and valuation of human resources can be classified into two categories as under:

a. Cost Based Methods:

This models is based on the valuation of human resource involve in computation of costs of human resources to the organisation.

The costs can be calculated by the following methods:

(i) Historical Cost Method:

This method was first developed by William C. Pyle assisted by R. E. Lee Brummet, EricG, Flamholtz and R. G. Barry Corporation, a leisure footwear manufacturer, Columbus Ohio, U.S.A. In this method, the actual costs incurred on recruiting, selecting, hiring, training and developing the human resources of the organisation are capitalised are amortised over the expected useful life of the human resources.

Prof Flamholtz refers that such costs is the ‘Original Cost of human resources and a portion of it is written off over the period an employee serves the organisation. If the employee leaves before the expected service period, the whole of the amount not written off is charged to the income of the year in which such liquidation takes place. If the useful life is recognized to be longer than originally expected, revisions are effected in the amortization schedule.

The value of human assets can be increased substantially by making investment in training in the same manner as the value of fixed assets is increased by making additions in them. Such additional costs incurred are also capitalised and are amortised over remaining life. The unexpired value is shown in balance sheet as investment in human. This method in highly objective and simple only meets the test of traditional principles of accounting.

This is only method which is used both for the valuation of human resources and recording the data in the books of accounts and presenting it in financial statements. However, this method suffers from certain drawbacks.

(a) It is very difficult to estimate the length of service of an employee in a particular organisation.

(b) This method takes into account only a part of employee acquisition costs, ignoring the aggregate value of their potential service.

(c) The economic value of human resources increases over time as the employee gain experience. However, in this approach the capital cost decreases through amortization. There is a problem of how to reconcile the above discrepancy.

(d) The problem of rate of amortization.

(ii) Replacement Cost Method:

This method was developed by Eric G. Flam Holtz on the basis of the concept of replacement cost first suggested by Rensis Likert. Replacement cost is the cost of replacing an existing employee of the organisation which include the cost of recruiting, selecting, hiring, training, and developing new employee to reach the level of competence of the existing employee.

Rensis Likert and Pyle suggested determination of the value of total human organisation on the basis of the assumption that a new similar organisation has to be created from the scratch. Hekimian and Jones have also advocated the use of replacement costs method when they say that In essence, we would value a human being at the estimated cost to us of replacing him with another person of equivalent talent and experience. There is a dual notion of replacement cost viz. positional and personal.

The same principles of amortization and write off is applied as in case of historical cost method. In this approach the current value of an organisation’s human resources is in corporate in the financial statements of the organisation which are prepared at the end of the financial year. It measures current value in terms of current units and so circumvents the problem.

The current replacement cost is an improvement over historical cost method, yet it suffers from following demerits:

(a) It is very difficult to find identical replacement of the existing human resources in actual practice.

(b) The determination the replacement value is affected by subjective or in-complete in-formation about human resources, the value is likely to differ from person to person.

(c) The delays in preparation and increased expenses for financial reports are expected.

(d) The replacement cost may not be equal to the value of human assets to the organisation due to imperfect markets and other variables such as, trade union, age, politics, seniority, labour Acts, and inaccurate appraisal of employee, etc.

(iii) Opportunity Cost Method:

This method was proposed by the Hekimian and Jones. They have suggested that opportunity cost in the value of an asset when there is an alternative use of it. For capital equipment and assets Joel Dean has defined opportunity costs as “the most profitable alternative use that is fore gone by putting it to its present use.” The concept of opportunity cost envisages the special situation where an undertaking has several divisions seeking the services of the same employee.

The opportunity cost of employee in one department is calculated on the basis of bids made by other department for the employee working in this department in the same organisation. If the employee can easily be hired externally, there is no opportunity cost of them, Bidding takes place only for those employees who are scarce. This shows that the opportunity cost in linked up with scarcity. This approach provides more optimal allocation of personnel.

The bid prices may contain the considerable additional information and may improve the ability of the financial records to serve as a lead indicator. However, this approach has narrow down the concept of opportunity cost by restricting it to the next best use of the employees within the same organisation. It excluded from its purview the employees which are not-scarce and are not being bid by other department.

This approach is likely to result in lowering the morale and productivity of the employees, which are not so covered under this process. A person may be an expert for one department and not for the other department. He may be a valuable person for the department in which he is working and hence may have a lower price in the bid by the other department. A low degree of objectivity can be expected from opportunity cost. This method is expensive to operate.

(iv) Standard Cost Method:

To overcome with the problem of the replacement cost method, the standard cost of recruiting, hiring, training and development per grade employees are developed and estimated and made up to date every year. The standard costs so arrived at, for all persons are treated as the value of human resources for accounting purposes. This is very simple and easy method. The variances produced can be analysed and would form a useful basis for control.

(v) Current Purchase Power Method:

In this approach, the historical cost of investment in human resources is converted into current purchasing power of money. This method is also very simple. .

b. Value Based Methods:

The present value of human resources of an organisation can be found out- (i) by discounting the future salaries and other capital costs, or (ii) by certain rate of discount the future earning of the organisation at a certain date by a suitable rate and allocating a part of the present value of earnings to human resources.

The following value based methods are as follows:

(i) Hermanson’s Unpurchased Goodwill Method:

For calculating value of human resources for the purpose of including them as assets in the balance sheet, the unpurchased good will method assumes that a business will earn normal rate of return on resources. If the rate of return is different from the normal rate, it may fairly presumed that some resources must be existing that have not been taken into account in preparing the balance sheet.

This method is based on economic concepts of value. This method is used the information contained in the existing records of the organisation and produces a high degree of objectivity.

However, this method suffers from the following disadvantages:

(a) The method relies on earnings of the previous year to calculate the rate of return but to determine economic value of the future earnings are required.

(b) The degree of reliability achieved will probably be poor.

(c) This method is more time consuming.

(d) No recognition is given to human resources needed to generate normal earnings.

(ii) Hermanson Adjusted Discount Future Wages Method:

Hermanson has suggested that human resources must be reported as asset in the financial statements. This method is based on the assumption that a relationship exists between a person’s salary and his value to the organisation. The wages is treated as a surrogate measure of a person’s value to the organisation.

The discounted future wage stream is adjusted by an efficiency ratio which is the weighted average ratio of the return on investments of the given organisation to all the organisations in the economy for a specified period.


RFo = The rate of accounting income on owned assets of the organisation for the current year.

REo = The average rate of accounting income on owned assets for all organisations in the economy for current year.

RF4 = The rate of accounting income on owned assets for the organisation for the fourth preceding year.

RE4 = The average rate of accounting income on owned assets for all organizations in the economy for the fourth the preceding year.

The efficiency ratio measures the effectiveness of human resources operating in an organisation over a period of five years. If efficiency ratio is greater than 1 means the average rate of return for an organisation is above the average rate for all organisations in the economy, on the other hand, if ratio is less than 1, the average rate of return for an organisation will be below the average rate of return of all organisation in the economy.

This method has been criticized on the following points:

(a) The efficiency ratio is subjective.

(b) The weighting scheme is purely arbitrary.

(c) The valuation period of five years is also without justification.

(iii) Lev and Schwartz Compensation Method:

The method of measurement of human capital suggested by Branch Lev and Aba Schwartz is based on the economic concept of human capital. Capital is defined as a source of income over a period of time and its worth is the present value of future incomes discounted by a certain rate. Irving Fisher, one of the originators of human capital theory states that “the value of capital must be computed from the value of its estimates future net income and not vice versa.”

However a close look at the definition of capital and its valuation shows that Fisher does not talk of human or non-human capital separately. However the valuation of human capital is an important as that of non-human capital because human beings have the productive capacity and in one form, in which wealth can be held.

The value of human capital represented by a person of age x is the present value of his remaining future earnings from his employment. They have given a formula for calculating the value of an individual.


Vx = the human capital value of a person X year old.

I (t) = The person’s annual earnings up to the retirement.

r = a discount rate specific to the person.

T = retirement age.

t = active service in years.

The determination of the total value of an organisation’s human force is a straight forward extension of the measurement of the value of individual. They have divided the whole human force into certain groups as un-skilled, semi-skilled, skilled, technical staff managerial staff etc.; and in accordance with different age groups. The average earning stream for different classes and age group are prepared for each group separately and the present value of human capital is calculated.

The aggregate present value of different groups of personnel will represent the capitalised future earning of the organisation as a whole. The use of cost of capital rate for the purpose of capitalizing the present value of the future earnings of the employees in made. The method identifies as individuals expected economic value to the organisation to his future earnings for this remaining active service life. His future expected income stream is discounted by an appropriate rate to arrive at the present value of his services.

This method provides information about changes in the structure of the human force. The HR value can be aggregate for all the organisation’s employees. It represents an advance over Hermanson arbitrarily chosen five year period for valuation.

However, this method also suffers from the following disadvantages.

(a) A person’s value to an organisation is not determined entirely by the person’s inherent qualities, traits, and skills but also by the organisational role in which the individual is placed. The individual’s skill and knowledge are not valuable only to an organisation in the abstract form. They are valuable only when such qualities serve as a means to achieve the organizational goals.

(b) The method does not take into account the possibility of an individual leaving the organisation other than death or retirement. The employees quit organisation for a variety of reasons.

(c) The employee will not make role changes during their career with die organisation also seems to be unrealistic because employees are quite of-ten transferred to other departments within the organisation and their role also changes when they are transferred on promotion.

(d) The degree of objectivity to be expected is likely to be low and a strong assumption for continuing of the organisation will have been made.

(e) The degree of reliability to be expected from the measure is not likely to be high.

(iv) Flamholtz’s Stochastic Rewards Valuation Method:

This method is based on principle that the human beings like all other assets are capable of providing future services that have economic value. The major variables that determine an individual’s value to an organisation which is his expected reliable value. The expected reliable value of an individual is the present worth of future services expected to be provided during the period he is expected to remain in an organisation.

The person’s value to an organisation depends upon the position to be occupied by him in the organisation. The movement of people from one organisational role to another is a stochastic process with rewards. The roles they will occupy in future will have to be determined probabilistically for each individual.

The individual’s expected realisable value is determined by two factors:

a. The individual’s conditional value, and

b. The probability that the individual will maintain his expected service life. The product of these two variables is the present worth of services expected to be derived by an organisation.

This method is an improvement over the Lev and Schwartz method because it takes into account the probability of a person’s career movement and of his leaving the organisation prior to his retirement or death. This method is a composite method which consists of both monetary and non-monetary variables. The outcome of the method enables the ideal value of individual to be found.

This method suffers from the following demerits:

(a) The operational capability falls short of a practical value.

(b) This method is tremendously an expensive way to predict career movements or exit probabilities on an individual basis.

(c) The problem is in obtaining valid data regarding die value of a service state, a person’s expected tenure and probabilities of occupying various service states as specified times.

(d) The method ignores the added value element of individuals operating as a group.

(e) This method also suffers from all those drawbacks from which Lev and Schwartz’s method suffers.

(v) Jaggi and Lau’s Method for Human Resources Valuation:

This method is based on valuation of groups rather than individual because for the purpose of mathematical analysis groups are preferable to individuals. They have suggested the use of Markov Chain Representation to consider the career movements of the employees within the organisation and the chances of their retirement or death. This method requires the determination of the Rank Transitional Matrix and the expected quantities of services for each rank of service.

The matrix is prepared from the historical personnel records generally available in the organisation. The value of the services an organisation’s current employees render in a future period is calculated by multiplying the estimated number of current employees that will be in each service state in that period by the value of the services an employee is each state renders to the organisation.


[TV] = Column vector indicating the current value of all current employees in each rants.

[N] = Column vector indicating the number of employees currently in each ranks.

n = Time period

r = Discount Rate

[T] = Rank Transitional Matrix indicating the probability that an employee will be in each rank within the organisation or terminated in the next period given his current rank. i.e. it represents the transitional probabilities after in time periods.

[V] = Column vector indicating the economic value of an employee of rank ‘I’ during each period.

This method over comes the drawbacks of the Flamholtz’s Stochastic Reward Valuation Method. The use of homogeneous group improves the reliability of the method. The preparation of transition matrix from historical personnel records ensures a reasonable degree of objectivity. This method is more complex because based on mathematical calculation and practical difficulties in computer. The operating cost of this method is also very high.

(vi) Robbinson’s Human Asset Multiplier Method:

The Institute of Personnel Management and the Institute of Cost and Management Accountants, London sponsored W. J. Giles and D. Robbins on to produce a report on Human Asset Accounting. They described Human Asset Multiplier method. This method advocates the use of a multiplier which when applied to the earnings of individuals provides a current valuation.

The method is based on the price earnings ratio which translates last reported company earnings into market capitalization. This method enables the value of human assets to be produced quickly and inexpensively. It provides basic data necessary for periodic human asset, balance sheets and profit and loss account and human asset profits and projections of the organisation.

Human Resource Accounting – 8 Main Advantages

The accurate information about human resources in needed if correct decisions are to be made about alternative investment in human resources.

The HRA offers the following advantages:

1. It can be useful in different phases of managerial planning and control such as HR planning, and recruitment etc.

2. It provides feedback on effectiveness of HR policies and practices.

3. It discloses the value of HR. This helps in proper interpretation of Return on Capital Expenditure.

4. It can facilitate decisions involving the education of resources to development projects.

5. It can assist management in conserving its human organisation by providing an early warning system.

6. It can help managers utilize human resources effectively and efficiently by providing a conceptual frame work for human resource utilisation.

7. It can be useful in the human resource evaluation process by developing valid and reliable methods of measuring the value of people to an organisation.

8. It provides significant and reliable in-formation for managerial and investors decision making.

Some Other Advantages of HRA:

1) HRA discloses the value of human resources. This helps in proper interpretation of Return on capital employed.

2) The maintenance of detailed record of HR (employees) improves managerial decision making in the areas like, recruitment, promotion, transfer retrenchment, retention, human relations and organizational behavior etc. HRA would definitely be improving the quality of management.

3) HRM serves social purpose too, by identification of HR as a valuable asset and prevents the misuse and under use of them due to reckless transfers, demotions, layoffs, maltreatment by their superiors, labour unrest/disputes etc.

4) HRA system helps in increasing productivity of HR, would boost the morale, loyalty and initiative of the employees.

Human Resource Accounting – 10 Limitations (With the Difficulties to Implement HRA in an Organisation)

HRA is the term used to describe the accounting methods, system and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in financial terms. It presumes that there is great difference among the personnel in their knowledge, ability and motivation in the same organisation as well as from organisation to organisation.

It means that some become liability too instead of being human assets. HRA facilitates decision making about the personnel i.e., either to keep or dispense with their services or to provide training. There are many limitations which make the management reluctant to introduce HRA.


i) There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human resources of an organisation. The systems which are being adopted have certain drawbacks.

ii) The period of existence of human resource is uncertain and hence valuing them under uncertainty in future seems to be unrealistic.

iii) There is a fear that HRA may dehumanise and manipulate employees.

iv) For example an employee with a comparatively low value may feel discouraged and develop a complex which itself will affect his competency to work.

v) The much needed empirical evidence is yet to be found to support of the hypothesis that HRA as a tool of the management facilitates better and effective management of human resources.

vi) In what form and manner, their value to be included in the financial statement is the question yet to be classified on which there is no consensus in the accounting profession.

vii) As human resources are not capable of being owned, retained and utilised, unlike the physical assets, there is problem for the management to treat them as assets in the strict sense.

viii) There is constant fear of opposition from the trade unions as placing a value on employees would make them claim rewards and compensations based on such valuation.

ix) In spite of all its significance and necessity, tax laws do not recognise human beings as assets.

x) As far as our country is concerned human resource accounting is still at the developmental stage. Much additional research is necessary for its effective application.

Difficulties to Implement HRA in an Organisation:

Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information of interested parties. In spite of various benefits of HRA for organisational excellence, there are still several difficulties in introducing HRA in an organisation.

The following are the difficulties:

1. On scanning through literature it has been found that good number models have been developed by different researchers for the valuation of HRs of an organisation, as per primary requirement of a module data required to fit the model, which is very difficult.

2. Besides above, the authorities are reluctant to recommend introduction of a particular model, because no uniform standard has so far been established for the measurement of HR value.

3. The management of organisations does not show interest in the valuation of HRs on the following pretext –

a. The valuation models have their own complex standards and difficult to implement,

b. Most of the management are least interested to disclose the organisational value of their HRs,

c. Another difficulty to human resource accounting is that by introducing HRA an organisation cannot get any tax relief.

d. There is no legal binding for disclosure of the HR value.

4. The ultimate motto of a profit-seeking organisation is to earn maximum profit. The system of HRA, in fact, neither helps in profit maximisation, nor facilitates in presenting the financial data in a greater way.

5. Since the values are based on estimates than on exchanges, the resultant statements are sometimes considered subjective, submissive and imaginary.

6. The last, not the least, difficulty is that the people are not owned by the organisations like other physical properties. As no ownership can be claimed on HRs, they lose their sales value. Most of the people concerned are, therefore, reluctant to measure and report such resources in the financial statements.

In spite of all the difficulties, it can be rightly claimed that HRA has opened a new vistas in the accounting world so that there will be a scope for evaluating and reporting HRs associated with the entity.

Human Resource Accounting – In India (With the Emerging Trends)

From a survey and study of the annual reports of private and public sector corporate entities in India, we observe and notice that chairman’s report invariably contains the state­ments highlighting the importance of human resources. The chairman of these companies make their remarks at annual general meeting that the employees are our most valuable assets and without their significant contribution, the present growth in production, turnover and operations would not have been attained.

“I wish to place it on record of my sincere gratitude for the hard work done by the employees of our company.” I thankfully acknowledge the contribution of our employees. These qualitative pronouncements reflect the significance of human resources in an organization but the information relating to their value is nowhere shown in financial accounts.

However, in practice, many companies, such as Bharat Heavy Electrical Ltd., Cement Corporation of India, Minerals and Metals Trading Corporation of India, Oil and Natural Gas Commission, steel Authority of India Ltd., Oil India Ltd., Hindustan Shipyard Ltd., Satyam Technologies Ltd., Associated Cement Company, TATA Engineer­ing and Locomative Works, Southern Petrochemical Industries Corpora­tion, Satyam Infosys Ltd., Wipro Ltd., Global tele-systems Ltd. Etc., value their human resources and report this information in their annual reports.

Position of HRA in India:

In India, very few companies use HRA. It is not compulsory in India. Infosys Technologies and BPL are the leading companies in India, which uses HRA. HRA reports give useful information to the company management, employees and investors.

In nutshell various techniques of control leads to as follows:

1. Budgetary control – Financial performance.

2. Cost control – Cost performance.

3. Production control – PERT, CPM, Production, performance, quality.

4. Inventory control – Stores function performance.

5. Profit & Loss Control ROL control – Overall organizational objective performance.

6. External audit control – Statutory performance.

7. Management self-audit.

Human Resource Accounting Practicing Companies in India:

Over the last few decades due to the development of business and industries, some of the Indian companies, both public and private, emphasise the values of their human resources and report this information in their annual report.

The companies, who are presently reporting human assets valuation, include:

1. Bharat Heavy Electrical Ltd. (BHEL);

2. Steel Authority of India Ltd. (SAIL);

3. Oil and Natural Gas Commissioning (ONGC);

4. Mineral and Metal Trading Corporation of India (MMTC);

5. Electrical India Ltd.;

6. Infosys Technologies Ltd.;

7. Tata Engineering and Locomotive Works;

8. Southern Petrochemicals Industries Corporation Ltd. (SPIC);

9. Hindustan Shipyard Ltd.;

10. Cement Corporation of India (CCI);

11. Associated Cement Company Ltd. (ACC);

12. National Thermal Power Corporation Ltd. (NTPC).

Emerging Trends:

In India, HRA has not been introduced so far as a system. The Companies Act, 1956 does not require furnishing of any significant information about human resource in financial statements of companies. The Institute of Chartered Accountants of India has issued accounting standards of different technical subjects of accounting but it has not been able to bring any definitive accounting standard for measurement and reporting of cost and value of “human resources” of an organisation.

The existing accounting standards, however, fully support the adoption of human resource accounting for the purpose of meeting their own requirements in true sense. The result of nondisclosure of human resources cost and value information in financial statements of business enterprises, has been that financial statements do not reveal any quantitative information on human resources side and the statement of affairs is improperly reported to different authorities.

The dichotomy in accounting between human and non-human capital is rather fundamental in that while fatter is recognised as an asset and recorded as such in the financial statements, the former is totally ignored. With the accelerated growth in science and technology the value of human capital is gradually increasing and hence it is essential for a company to reflect the investment in human resources.

Recently, the idea of human resources accounting attracted the minds of many scholars vis., Hermanson, Hekiman Jones, Likert, Flam holtz, Brument and others. The modern thinking of these scholars is that all the assets of the Company including the human asset must be properly treated, analysed and reported by an accounting system in view of the long-term interest of the organisation. So the HRA is needed in this context.

The application and usefulness of HRA depends on the future efforts and experiments to be made by practicing managers, accountants and academicians. The application of HRA also needs support from the professional bodies and government. In the absence of HRA, the management may not realise the negative effects of certain programmes aimed at improving profits in the short-run. Such programmes may result in decreased value of human assets due to fall in the productivity levels, high labour turnover, low morale, etc.

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