Hr Accounting Imp,obj.docx

Importance, Objectives, methods, Limitations of Human Resource Accounting Human resource Accounting is the process of identifying and reporting the Investments made in the Human Resources of an Organisationthat are presently not accounted for in the conventional accounting practices. In simple terms, it is an extension of the Accounting Principles

of matching the costs and revenues and of organising data to communicate relevant information in financial terms.

Importance of Human Resource Accounting HRA provides useful information to the management, financial analysts and employees as stated below:1. HRA helps the management in Employment and utilisation of Human Resources. 2. It helps in deciding transfers, promotion, training and retrenchment of human resources 3. It provides a basis for the planning of physical assets vis-a-vis human resources 4. It helps in evaluating the expenditure incurred for imparting further education and training of employees in terms of the benefitsderived 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 humanresources or both 7. It helps in understanding and assessing the inner strength of an organisation and helps the management to steer the companywell through the most averse and unfavourable circumstances. 8. It provides valuable information for persons interested in making long term investments in the firm. 9. It helps the employees in improving their performance and bargaining power. It makes each employee understand his contributiontowards the betterment of the firm vis-a-vis the expenditure incurred by the firm on him

Objectives of Human Resource Accounting 1. To furnish cost value information for making proper and effective management decisions about acquiring, allocating developingand maintaining human resources in order to achieve cost effective organisational objectives. 2. To monitor effectively the use of human resources by the management. 3. To have an analysis of the Human Asset, i.e. whether such assets are conserved, depleted or appreciated. 4. To aid in the development of management principles and proper decision making for the future by classifying financialconsequences of various practices. 5. It is one of the latest mode of accounting technique Methods of Human Resource Accounting There are two approaches to HRA. Under the cost approach ,also called human resource cost accounting method or model, there is a) Acquisition cost model and b)replacement cost model. Underthe

value approach there are a) present value of future earnings method, b) discounted future wage model, c) competitive bidding model.

Cost Approach This approach is also called as acquisition cost model. This approach is developed by Brummet,

Flamholmay tz and Pyle . This method measures the organization’s investment in employees using the five parameters:recruiting,

acquisition; formal training and, familiarization; informal training, Informal familiarization; experience; and development. This model suggest instead of charging the costs to p&l accounting it should be capitalized in balance sheet. The process of giving a status of asset to theexpenditure item is called as capitalization. In case of human resource it is necessary to amortize the capitalized amount over a period oftime. so here one will take the age of the employee at the time of recruitment and at the time of retirement. out of these a few employee mayleave the organization before attaining the superannuation. This is similar to a physical asset. e.g.: If company spends one lakh on anemployee recruited at 25 years, and he leaves the organization at the age 50, he serves the company for 25 years (his actual retirement age was 55 years). The company has recovered rupees 83333.33 so the unamortized amount of rupees 16666.66 should be charged to p&l account i.e.