Human resource accounting definition
/What is Human Resource Accounting?
Human resource accounting involves the tracking of all costs related to employees in a separate report. These costs include employee compensation, payroll taxes, benefits, training, and recruiting. Such an accounting system can be used to determine where human resources costs are especially heavy or light in an organization. This information can be used to redirect employees toward those activities to which they can bring the most value. Conversely, the report can be used to identify those areas in which employee costs are too high, which may lead to a reduction in force or a reallocation of staff away from those areas.
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A more comprehensive human resource accounting system goes beyond the simple tracking of employee-related costs, and addresses the following two additional areas:
Budgeting
An organization's annual budget includes a human resources component, in which is concentrated all employee costs being incurred from across the organization. By concentrating cost information by its nature, management can more clearly see the total impact of human resource costs on the entity. This can be quite useful when compensation and benefit costs comprise the largest component of an organization’s expenses.
Employee Valuation
Rather than looking at employees as costs, the system is redirected toward viewing them as assets. This can involve the assignment of values to employees based on their experience, education, innovativeness, leadership, and so forth. This can be a difficult area in which to achieve a verifiable level of quantification, and so may have limited value from a management perspective.
From an accounting perspective, the expense-based view of human resources is quite easy - employee costs from the various departments are simply aggregated into a report. The employee valuation approach is not a tenable concept for the accountant, since this is an internally-generated intangible asset, and so cannot be recorded in the accounting system.
Disadvantages of Human Resource Accounting
There are several disadvantages associated with human resource accounting, which are as follows:
Poor value analysis. A concern with human resource accounting is that a business might not adopt a sufficiently rigorous analysis of the value of its employees. The result might be flawed decisions that are based on insufficient or skewed information.
No link to strategy. The relative value of employees may not be directly associated with the overall strategy of a business, so managers might become bogged down in human resource accounting analyses when they should be focusing on strategic issues that have more long-term relevance to the organization.