Advantages and Disadvantages of Human Resource Accounting


Meaning of Human Resource Accounting

Human Resource Accounting is an accounting branch concerned with recognising and measuring information about human resources working in an organisation. It is a process of measuring the cost and value of human resources (employer and employee) and delivering this information to concerned parties. Human resource accounting measures expenses associated with human assets in recruiting, selecting, hiring, training and developing them. This accounting term determines the present economic value of all its employees and managers.

Human resources are key elements of every organisation and have an important role in the achievement of desired goals. Human resource accounting helps in the management of all human resources by communicating information in the form of reports to top management for better decision making. It aims at formulation and implementation of management principles for controlling human resource activities.

Human resources accounting has overcome the problems that exist in conventional accounting which do not consider and record any information related to human resources. In the absence of manpower, all financial and physical resources of the organisation cannot operate efficiently, that makes the management of human resource quite important. Human resource accounting has made it easy to monitor and fully utilise all human resources working with the organisation. Advantages of Human Resource Accounting are explained in detail below:

Advantages of Human Resource Accounting

Advantages of Human Resource Accounting
Advantages of Human Resource Accounting

Better Manpower Planning

Human resource accounting helps organisations in properly planning and managing their human resources. It records each and every detail about manpower working with the organisation. It measures the cost and value of human resources as well as determines their strengths and weakness. All the information collected and recorded is communicated to management from time to time. This helps management in taking right decisions and better planning of human resources.

Proper Utilization of Human Resources

Efficient utilisation of manpower is important for every business. It has an efficient role in increasing profitability and productivity. Human resource accounting aims at increasing the efficiency of human resources. It helps in monitoring the activities of manpower by supplying relevant information to managers. Different steps are taken by management from time to time to improve their performance as per information provided to them.

Designs Training and Development Programmes

Human resource accounting helps in designing proper training and development programmes for employees. It helps in measuring the output by recording and analysing all data about manpower. Inefficiency of employees can be easily detected. This helps in providing training and education to all employees according to their skills and experience.

Formulates Better Personal Policies

Human resource accounting helps in the formulation of better policies for human resources. It supports the managers in framing policies related to promotion, transfer, job satisfaction, favourable working environment etc. Management gets full details about all employees through human resource accounting which helps them in framing strategic policies as per the requirement of time.

Motivates Employees

Human resource accounting helps the organisation in taking all necessary steps for the growth of its employees. It tells the organisation full details about its employee’s affairs and their condition. This helps in designing various welfare programmes by business which improves their satisfaction level. Employees feel that the company cares for them which boost their morale and motivates them to work hard towards their roles.

Attracts Best Manpower

Human resource accounting is practised by reputed and big corporates. Implementation of Human resource accounting improves the goodwill and image of business. Many talented and competent employees want to be the part of these reputed companies. This, therefore, helps in attracting and retaining the best manpower in business.

Communicates Information to Investors

It delivers all relevant information to investors. Human resource accounting analyses and prepares reports about manpower working in the organisation and present these report to all concerned parties. These reports clearly depict the productivity of manpower which can be used in determining the true picture of the business state. Investors can easily determine profitability and future growth aspects of business and accordingly take their investing decisions.

Disadvantages of Human Resource Accounting

No clear-cut guidelines

Human resource accounting lacks clear cut guidelines on how to differentiate the ‘cost’ and ‘value’ of human resources. There are many drawbacks present in the system used currently for valuing human resources. Life of human is uncertain and therefore valuing them like assets under such foggy conditions is improper. The human resources unlike other physical assets cannot be owned, retained and used as per the pleasure of organization. Also, human resources may leave the organization after getting valued. It is not an easy task to value human resources under such conditions. 

Measurement problems

Another major drawback in accounting of human resource is the presence of numerous measurement problems. There is no agreement in between the finance professionals and accountants with regard to method of measurement. The manner in which human resources should be valued and shown in balance sheet is not specified. In addition to this, problems are further compounded due to question of amortization/recovery rate. 

Absence of standardized procedure

The human resource accounting does not have any standardized procedure of valuation. It lacks universal acceptability of principles unlike conventional system of accounting. The methods of human resource accounting lack wider acceptance which avoids uniformity. Moreover, the principles are based on various assumptions that may prove wrong at any point of time. 

Dehumanize human resources

The valuation of human resources may result in dehumanizing and manipulating the employees. Persons who are given low values are demotivated or discouraged which adversely influence their competencies in work. A feeling of jealousy may erupt among employees when they came to know the differences in relative values leading to disturb the team solidarity. 

No evidence

There is no proper empirical evidence available till yet to prove the utility of HRA. It is a hypothesis that HRA acts as managerial tool which facilitates the effective and better management of employees. 

Idea may not be accepted

There is a fear that trade unions and employees may not accept the idea. There may be a division of employees due to their valuation at different levels as those who are low valued may feel discouraged. Trade unions may disapprove idea on the fact that employees will be rewarded on the basis of their valuation in organization. 

Unrealistic valuation

Human resource accounting seems to be unrealistic approach of valuation. The lifespan of human is uncertain and it cannot be estimated at all. Taking assumption on human life may go wrong at any time thereby resulting in false results.