Human resource accounting is a method used to quantify the value of employees to an organization. It involves measuring costs related to recruiting, training, and developing employees. The objectives of human resource accounting are to properly measure and account for costs associated with human resources, ensure resources are being utilized effectively, and determine if investments in employee training and development are providing a return to the organization. Some common methods used in human resource accounting are the historical cost method, replacement cost method, and economic value method, which assign monetary values to employees based on past costs or future earnings potential. Non-monetary methods include the expected realization value method and discounted present value of future earnings method.

1. Part-2
Human resources accounting

2. Human resource accounting
Human Resource Accounting is a term applied by the Accountancy Profession
to quantify the cost and value of employees of their employing organization.
Human resource accounting is accounting and recognition of expenses related
to employees of the organization and involves costs related to recruitment,
selection, training, hiring etc. it is the process of identifying and measuring data
about Human Resources and communicating this information to the interested
parties. It is an attempt to identify and report the Investments made in Human
Resources of an organization that are currently not accounted for in the
Conventional Accounting Practices.
According to Flamholtz – “Human resource accounting is accounting for
people as an organizational resource. It involves measuring the costs
incurred by business firms and other organizations to recruit, select, hire,
train, and develop human assets. It also involves measuring the economic
value of people to the organizations.”

3. Objectives of human resource accounting
The objectives of Human resource accounting are as follows –
•Measuring cost related to the human resource of the organization.
•Enabling management to properly plan and budget for training and other
services for the human resource.
•To ensure proper utilization of resources is done or not.
•Increasing awareness and value about human resources.
•To proper accounting of retiring benefits and other benefits over the service
period;
•To determine whether an organization has gained from inputs put on human
resources, training, recruitment, and other facilities.

4. Step-1
HRA Objectives
Step-2
Developing HRA
Measurements
Step-3
Developing HR
Accounting
Database
Step-4
Pilot Testing the
System
Step-5
Implementing the
Human Resource
Accounting System
Human resource accounting process

5. advantages disadvantages
 Sign of Good Health of the
Organisation.
 Help in Determining the Need of
Recruitment
 Ascertains Negative Effects of the
Programmes.
 Facilitates Scheduling and
Implementing HR Policies.
 Helps in Calculating ROI.
 Motivates Employees.
 Improves Process of Decision Making.
 Variety of Methods Create
Confusion
 Uncertainty about Continuance of
Employees
 Results in expoitation organisation
 Lack of Perfect Knowledge about
Future Receiving of HR
 Trade Union Resistance
 Expensive
 Non Availability of Standards

6. Methods of human resource accounting
Monetary Measures Non-Monetary Measures
Historical Cost Method Expected Realization Value Method
Replacement Cost Method
Discounted Present Value of Future
Earnings
Opportunity Cost Method
Economic Value Method

7. Monetary Measures:-
1.Historical Cost Method:-This method was developed in 1967 by William C. Pyle. The
historical cost approach means the actual cost experienced by the organization in hiring,
developing, and training of the employees is capitalized over for the useful period of
human resources.
 The expenses made in all the selection, recruitment, and development of employees is
recorded in written form during which human resource will provide the service.
 The advantage of this method is it is easy to understand and implement but its
disadvantage is it is hard to determine how long employees will carry on his/her job.
2.Replacement Cost Method:-The replacement cost method was first introduced by Eric,
G Flamholtz. In this method, the cost of replacing employees is calculated. It is based on the
assumption that it will cost the organization if the current human resource is replaced by
new employees having the same talent and experience.
3.Opportunity Cost Method:-The opportunity cost method of human resource accounting,
also referred to as the competitive bidding model, assigns value to an employee based on
what each department would be willing to pay him. This method envisions a fictitious
situation in which a company suddenly finds labor and talent scarce and individual
divisions or departments within the company must bid on existing employees.

8. 4.Economic Value Method:-The economic value model of human resource accounting involves
estimating the total inflow of cash that will be produced by an employee over the course of his
service to the company. Subtract the total cost of hiring, training, developing and paying an
employee from the estimate of the cash he will generate for the company, and you have arrived
at his net worth according to the economic value method of HR accounting.
Non-Monetary Measures:-
1. Expected Realization Value Method:-The above methods discussed so far are based on cost
consideration. Therefore these methods may provide information for record purpose but do not
reflect the true value of human assets. As against these methods.
Expected realizable value is based on the assumption. And this is true also. That there is no
direct relationship between cost incurred on an individual and his value to organization can be
defined as the present worth of the set of future services that he is expected to provide during
the period he remains in the organization.
2. Discounted Present Value of Future Earnings:-This Model of human resource accounting
was developed by Lev and Schwartz in the year 1971 and involves determining the value of
human resources as per the present value of estimated future earnings discounted by the rate of
return on Investment (Cost of Capital). The assumptions in this method are realistic and
scientific. The method has practical applicability when availability of quantifiable and
analyzable data is concerned, but this model is unable to give any method to record the value of
human resources in the Books of Accounts.

9. According to this model, the value of human capital embodied in a person who is ‘y’ years old, is
the present value of his/her future earnings from employment and can be calculated by using
the following formula –
E (Vy) = Py (t + 1) I (T)/(I + R)
Where,
E (Vy) = expected value of a ‘y’ year old person’s human capital
T = the person’s retirement age
Py (t) = probability of the person leaving the organization
I (t) = expected earnings of the person in period
I r = discount rate
t-y

10. Thank you