Lecture 2 - Human Resource Accounting | Human Resource Management - Business Basics PDF Download

 Page 1


 
Institute of Lifelong learning, University of Delhi 
Page1 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Human Resource Management 
Lesson: Human Resource Accounting 
Author: Ms. Shachi Yadav, Assistant Professor,  
Ramjas College, Delhi University 
Reviewer: Prof. Anand Prakash 
 
 
 
 
 
 
 
 
 
Page 2


 
Institute of Lifelong learning, University of Delhi 
Page1 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Human Resource Management 
Lesson: Human Resource Accounting 
Author: Ms. Shachi Yadav, Assistant Professor,  
Ramjas College, Delhi University 
Reviewer: Prof. Anand Prakash 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong learning, University of Delhi 
Page2 
 
 
 
Lesson: Human Resource Accounting and HRD Audit  
Table of Contents 
1: Learning Outcomes 
2: Introduction 
3: Emergence of the Concept of Human Resource Accounting 
4: Methods of Human Resource Accounting 
4.1 Methods, Based on Costs 
4.2 Methods, Based on Value 
5: HRD Audit  
6: Areas of HRD Audit 
7: Methods of HRD Audit 
Summary 
Glossary 
Exercises 
References 
 
 
1. Learning Outcomes: 
 
After you have read the lesson, you should be able to: 
? comprehend the theoretical framework, behind the concept of Human Resource 
Accounting; 
? appreciate the concept of human assets in organizations; 
? comprehend the development of thought, concerning Human Resource Accounting; 
? analyse the methods of Human Resource Accounting; 
? examine the theoretical understanding, behind the concept of HRD Audit;  
? examine the scope of Human Resource Development audit in an organization; 
? analyse the methods of Human Resource Development audit; 
? appreciate the concept of Human Resource Development Score Card. 
 
2. Introduction: 
 
“The most valuable of all capital is that invested in human beings.” 
(Alfred Marshall, Principles of Economics) 
 
Page 3


 
Institute of Lifelong learning, University of Delhi 
Page1 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Human Resource Management 
Lesson: Human Resource Accounting 
Author: Ms. Shachi Yadav, Assistant Professor,  
Ramjas College, Delhi University 
Reviewer: Prof. Anand Prakash 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong learning, University of Delhi 
Page2 
 
 
 
Lesson: Human Resource Accounting and HRD Audit  
Table of Contents 
1: Learning Outcomes 
2: Introduction 
3: Emergence of the Concept of Human Resource Accounting 
4: Methods of Human Resource Accounting 
4.1 Methods, Based on Costs 
4.2 Methods, Based on Value 
5: HRD Audit  
6: Areas of HRD Audit 
7: Methods of HRD Audit 
Summary 
Glossary 
Exercises 
References 
 
 
1. Learning Outcomes: 
 
After you have read the lesson, you should be able to: 
? comprehend the theoretical framework, behind the concept of Human Resource 
Accounting; 
? appreciate the concept of human assets in organizations; 
? comprehend the development of thought, concerning Human Resource Accounting; 
? analyse the methods of Human Resource Accounting; 
? examine the theoretical understanding, behind the concept of HRD Audit;  
? examine the scope of Human Resource Development audit in an organization; 
? analyse the methods of Human Resource Development audit; 
? appreciate the concept of Human Resource Development Score Card. 
 
2. Introduction: 
 
“The most valuable of all capital is that invested in human beings.” 
(Alfred Marshall, Principles of Economics) 
 
 
Institute of Lifelong learning, University of Delhi 
Page3 
The above statement accentuates the fact that human beings have played a key role in 
the process of development of civilization. 
 
There are unquestionable abilities in human beings. We, as human beings, are the 
contributors to the growth and development of our organizations. Our conscious 
endeavours make a difference in the way of organizations? working. Organization?s 
success or failure is largely dependent upon the effective and efficient performance of 
employees. Human resources, of an organisation, become more valuable in light of the 
fact that no other tangible or intangible asset can replace human resources, and these 
resources develop and influence the other tangible and non-tangible assets.  
 
Unlike non-living assets, human resources can take their decisions on their own, and 
their performance is not predictable. These idiosyncrasies of human resources make 
human asset management a challenging job for the organizations. 
 
A generally satisfactory concept is that good management calls for good measurement. 
Accounting helps to generate an effective measurement and reporting system for 
decision making.  It makes sense to measure human assets in order to improve 
managerial decision making in organizational contexts. 
With the evidence, suggesting the increased share of knowledge based organizations and 
services in Gross Domestic Product, it has become important to harness human 
resources for organizational value creation. 
 
The importance of developing a process to identify and measure the data, concerning 
human resources and its communication to stakeholders, has been emphasized by 
committee on Human Resource Accounting of the American Accounting Association. 
 
Value Addition :1 Discussion Forum 
Test of Ethics 
Discuss the ethical relevance and acceptability of valuation of Human assets in the 
organization. Develop arguments for and against inclusion of Human assets in the 
accounting statement. 
 
3. Emergence of Human Resource Accounting: 
 
Are people measureable assets? 
 
Sprouse and Moonitz have observed that assets represent future economic benefits they 
are capable of rendering to the organization, rights to which have been acquired by the 
organization as an outcome of some current or past transaction. 
Since people are not legally owned by the organizations, the treatment of human 
resources, as assets, has been criticized by some authors.  
 
This view may be countered on several grounds. The concern for human valuation is 
primarily with the performance of human services, not with humans per se. Now, the 
question arises whether employee services qualify as assets. Let?s give some 
consideration to the economic viewpoint, as suggested by American Accounting 
Association?s definition, which says that accounting is primarily concerned with events 
and objects that have economic significance and this does not necessarily involve legal 
ownership.  
Page 4


 
Institute of Lifelong learning, University of Delhi 
Page1 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Human Resource Management 
Lesson: Human Resource Accounting 
Author: Ms. Shachi Yadav, Assistant Professor,  
Ramjas College, Delhi University 
Reviewer: Prof. Anand Prakash 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong learning, University of Delhi 
Page2 
 
 
 
Lesson: Human Resource Accounting and HRD Audit  
Table of Contents 
1: Learning Outcomes 
2: Introduction 
3: Emergence of the Concept of Human Resource Accounting 
4: Methods of Human Resource Accounting 
4.1 Methods, Based on Costs 
4.2 Methods, Based on Value 
5: HRD Audit  
6: Areas of HRD Audit 
7: Methods of HRD Audit 
Summary 
Glossary 
Exercises 
References 
 
 
1. Learning Outcomes: 
 
After you have read the lesson, you should be able to: 
? comprehend the theoretical framework, behind the concept of Human Resource 
Accounting; 
? appreciate the concept of human assets in organizations; 
? comprehend the development of thought, concerning Human Resource Accounting; 
? analyse the methods of Human Resource Accounting; 
? examine the theoretical understanding, behind the concept of HRD Audit;  
? examine the scope of Human Resource Development audit in an organization; 
? analyse the methods of Human Resource Development audit; 
? appreciate the concept of Human Resource Development Score Card. 
 
2. Introduction: 
 
“The most valuable of all capital is that invested in human beings.” 
(Alfred Marshall, Principles of Economics) 
 
 
Institute of Lifelong learning, University of Delhi 
Page3 
The above statement accentuates the fact that human beings have played a key role in 
the process of development of civilization. 
 
There are unquestionable abilities in human beings. We, as human beings, are the 
contributors to the growth and development of our organizations. Our conscious 
endeavours make a difference in the way of organizations? working. Organization?s 
success or failure is largely dependent upon the effective and efficient performance of 
employees. Human resources, of an organisation, become more valuable in light of the 
fact that no other tangible or intangible asset can replace human resources, and these 
resources develop and influence the other tangible and non-tangible assets.  
 
Unlike non-living assets, human resources can take their decisions on their own, and 
their performance is not predictable. These idiosyncrasies of human resources make 
human asset management a challenging job for the organizations. 
 
A generally satisfactory concept is that good management calls for good measurement. 
Accounting helps to generate an effective measurement and reporting system for 
decision making.  It makes sense to measure human assets in order to improve 
managerial decision making in organizational contexts. 
With the evidence, suggesting the increased share of knowledge based organizations and 
services in Gross Domestic Product, it has become important to harness human 
resources for organizational value creation. 
 
The importance of developing a process to identify and measure the data, concerning 
human resources and its communication to stakeholders, has been emphasized by 
committee on Human Resource Accounting of the American Accounting Association. 
 
Value Addition :1 Discussion Forum 
Test of Ethics 
Discuss the ethical relevance and acceptability of valuation of Human assets in the 
organization. Develop arguments for and against inclusion of Human assets in the 
accounting statement. 
 
3. Emergence of Human Resource Accounting: 
 
Are people measureable assets? 
 
Sprouse and Moonitz have observed that assets represent future economic benefits they 
are capable of rendering to the organization, rights to which have been acquired by the 
organization as an outcome of some current or past transaction. 
Since people are not legally owned by the organizations, the treatment of human 
resources, as assets, has been criticized by some authors.  
 
This view may be countered on several grounds. The concern for human valuation is 
primarily with the performance of human services, not with humans per se. Now, the 
question arises whether employee services qualify as assets. Let?s give some 
consideration to the economic viewpoint, as suggested by American Accounting 
Association?s definition, which says that accounting is primarily concerned with events 
and objects that have economic significance and this does not necessarily involve legal 
ownership.  
 
Institute of Lifelong learning, University of Delhi 
Page4 
It follows from the above discussion that to be considered as an asset a resource must 
have service potential for the future. 
 
The argument can be forwarded on the grounds that the service potential of the 
employees is not assured for the future. But that there is no assurance of future benefit 
from human resources is equally true of other resources. In the world of uncertainty, 
one can never be sure of future benefit from any asset, including physical asset like 
machinery , accounts receivable etc. on the basis of the above argument, it can be said 
that human resources are as much assets as any other resource. 
 
As noted by Brummet and Flamholtz, measurement of the value of human resources can 
assist the management, in recognizing and defining problems, related to people at work. 
If the accounting system is made to include the value of firm?s human resource and its 
changes over time, the adjusted figure would give a more realistic measurement of 
managerial effectiveness. 
 
Human Resource Accounting can be understood as a tool that can be used to generate 
and report quantitative information, about the contribution of human resource, for the 
promotion of organizational productivity. 
 
The underlying premises, supporting the concept of Human Resource accounting, are: 
 
a) Human resources are valuable resources of an organization. 
b) The ways these resources are managed greatly determine their effectiveness and 
efficiency. 
c) Information on investment and value of human resources is useful for decision making in 
the organization. 
 
 
“Human Resource Accounting is the process of identifying and measuring data about 
human resources and communicating this information to the interested parties.” 
    - American Accounting Association, 1973 
 
“Human Resource Accounting is the process of developing financial assessments for 
people within organization and society and the monitoring of these assessments through 
time. It deals with investments in people and with economic results of those 
investments.” -R Lee Brummet, Eric G. Flamholtz and William C. Pyle. 
 
“Human Resource Accounting can be defined as the process of identifying, qualifying, 
accounting and forecasting the value of human resource in order to facilitate effective 
human resource management.”  - John Bratton and Jeffery Gold, 20039 
Interactive 1 
Value Addition :2  Activity 
Analysing the Annual Reports of Selected Companies 
Page 5


 
Institute of Lifelong learning, University of Delhi 
Page1 
 
 
 
 
 
 
 
 
 
 
 
 
Paper: Human Resource Management 
Lesson: Human Resource Accounting 
Author: Ms. Shachi Yadav, Assistant Professor,  
Ramjas College, Delhi University 
Reviewer: Prof. Anand Prakash 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong learning, University of Delhi 
Page2 
 
 
 
Lesson: Human Resource Accounting and HRD Audit  
Table of Contents 
1: Learning Outcomes 
2: Introduction 
3: Emergence of the Concept of Human Resource Accounting 
4: Methods of Human Resource Accounting 
4.1 Methods, Based on Costs 
4.2 Methods, Based on Value 
5: HRD Audit  
6: Areas of HRD Audit 
7: Methods of HRD Audit 
Summary 
Glossary 
Exercises 
References 
 
 
1. Learning Outcomes: 
 
After you have read the lesson, you should be able to: 
? comprehend the theoretical framework, behind the concept of Human Resource 
Accounting; 
? appreciate the concept of human assets in organizations; 
? comprehend the development of thought, concerning Human Resource Accounting; 
? analyse the methods of Human Resource Accounting; 
? examine the theoretical understanding, behind the concept of HRD Audit;  
? examine the scope of Human Resource Development audit in an organization; 
? analyse the methods of Human Resource Development audit; 
? appreciate the concept of Human Resource Development Score Card. 
 
2. Introduction: 
 
“The most valuable of all capital is that invested in human beings.” 
(Alfred Marshall, Principles of Economics) 
 
 
Institute of Lifelong learning, University of Delhi 
Page3 
The above statement accentuates the fact that human beings have played a key role in 
the process of development of civilization. 
 
There are unquestionable abilities in human beings. We, as human beings, are the 
contributors to the growth and development of our organizations. Our conscious 
endeavours make a difference in the way of organizations? working. Organization?s 
success or failure is largely dependent upon the effective and efficient performance of 
employees. Human resources, of an organisation, become more valuable in light of the 
fact that no other tangible or intangible asset can replace human resources, and these 
resources develop and influence the other tangible and non-tangible assets.  
 
Unlike non-living assets, human resources can take their decisions on their own, and 
their performance is not predictable. These idiosyncrasies of human resources make 
human asset management a challenging job for the organizations. 
 
A generally satisfactory concept is that good management calls for good measurement. 
Accounting helps to generate an effective measurement and reporting system for 
decision making.  It makes sense to measure human assets in order to improve 
managerial decision making in organizational contexts. 
With the evidence, suggesting the increased share of knowledge based organizations and 
services in Gross Domestic Product, it has become important to harness human 
resources for organizational value creation. 
 
The importance of developing a process to identify and measure the data, concerning 
human resources and its communication to stakeholders, has been emphasized by 
committee on Human Resource Accounting of the American Accounting Association. 
 
Value Addition :1 Discussion Forum 
Test of Ethics 
Discuss the ethical relevance and acceptability of valuation of Human assets in the 
organization. Develop arguments for and against inclusion of Human assets in the 
accounting statement. 
 
3. Emergence of Human Resource Accounting: 
 
Are people measureable assets? 
 
Sprouse and Moonitz have observed that assets represent future economic benefits they 
are capable of rendering to the organization, rights to which have been acquired by the 
organization as an outcome of some current or past transaction. 
Since people are not legally owned by the organizations, the treatment of human 
resources, as assets, has been criticized by some authors.  
 
This view may be countered on several grounds. The concern for human valuation is 
primarily with the performance of human services, not with humans per se. Now, the 
question arises whether employee services qualify as assets. Let?s give some 
consideration to the economic viewpoint, as suggested by American Accounting 
Association?s definition, which says that accounting is primarily concerned with events 
and objects that have economic significance and this does not necessarily involve legal 
ownership.  
 
Institute of Lifelong learning, University of Delhi 
Page4 
It follows from the above discussion that to be considered as an asset a resource must 
have service potential for the future. 
 
The argument can be forwarded on the grounds that the service potential of the 
employees is not assured for the future. But that there is no assurance of future benefit 
from human resources is equally true of other resources. In the world of uncertainty, 
one can never be sure of future benefit from any asset, including physical asset like 
machinery , accounts receivable etc. on the basis of the above argument, it can be said 
that human resources are as much assets as any other resource. 
 
As noted by Brummet and Flamholtz, measurement of the value of human resources can 
assist the management, in recognizing and defining problems, related to people at work. 
If the accounting system is made to include the value of firm?s human resource and its 
changes over time, the adjusted figure would give a more realistic measurement of 
managerial effectiveness. 
 
Human Resource Accounting can be understood as a tool that can be used to generate 
and report quantitative information, about the contribution of human resource, for the 
promotion of organizational productivity. 
 
The underlying premises, supporting the concept of Human Resource accounting, are: 
 
a) Human resources are valuable resources of an organization. 
b) The ways these resources are managed greatly determine their effectiveness and 
efficiency. 
c) Information on investment and value of human resources is useful for decision making in 
the organization. 
 
 
“Human Resource Accounting is the process of identifying and measuring data about 
human resources and communicating this information to the interested parties.” 
    - American Accounting Association, 1973 
 
“Human Resource Accounting is the process of developing financial assessments for 
people within organization and society and the monitoring of these assessments through 
time. It deals with investments in people and with economic results of those 
investments.” -R Lee Brummet, Eric G. Flamholtz and William C. Pyle. 
 
“Human Resource Accounting can be defined as the process of identifying, qualifying, 
accounting and forecasting the value of human resource in order to facilitate effective 
human resource management.”  - John Bratton and Jeffery Gold, 20039 
Interactive 1 
Value Addition :2  Activity 
Analysing the Annual Reports of Selected Companies 
 
Institute of Lifelong learning, University of Delhi 
Page5 
Document the corporate reporting practices of select Indian companies, both in private 
and public sector, concerning Human Resource Accounting. Gauge the recent trend and 
commonly accepted human resource accounting practice in India.  
 
 
 
4. Methods of Human Resource Accounting: 
We have already discussed that the concept of human value is derived from the concept 
of general economic value of all resources. Information, generated from valuation and 
accounting of human resources, is a key ingredient of managerial decision making. Over 
and above this major objective of internal management, the relevant human resource 
data is expected to be useful to other stakeholders, e.g., investors, creditors, financers 
and government agencies. Approaches to the methods of measuring the value of human 
resources have been developed by a number of authors, keeping the nature and use of 
such data in mind.  
Figure 1: Methods of Human Resource Accounting