Benefits of human resource accounting


Benefits of HRA can be listed thus:

1. The adoption of the system of HRA discloses the value of human resources. This helps in proper interpretation of Return on Capital Employed. Such information would give a long term perspective of the business performance which would be more reliable than the Return on Capital Employed under the conventional system of accounting.

2. The maintenance of detailed record relating to internal human resources(i.e. employees) improves managerial decision-making specially institutions like direct recruitment versus promotions; transfer versus retention retrenchment or relieving versus retention; utility of cost reduction programs in view of its possible impact on human relations and impact of budgetary control on human relations and organizational behavior. Thus, the use of HRA will definitely improve the quality of management.

3. The adoption of the system of HRA serves social purposes by identification of human resources as a valuable asset which will help prevention of misuse and under use due to thoughtless or rather reckless transfers, demotions, layoffs and day-to-day maltreatment by supervisors and other superiors in the administrative hierarchy; efficient allocation of resources in the economy ;efficiency in the use of human resources; and proper understanding of the evil effects of avoidable labor unrest / disputes on the quality of internal human resources.

4. The system of HRA would no doubt, pave the way for increasingly productivity of human resources, because, the fact that a monetary value is attached to human resources and that human talents devotion and skill considered as valuable assets and allotted a place in the financial statements of the organization, would boost the morale, loyalty and initiative of the employees, creating in their mind a sense of belonging towards the organization and would act as a great incentive, giving rise to increased productivity.

HRA in India

Under the constraints the financial statements are prepared pursuant to the Company Law in India there is no scope for showing any significant information about human resources in financial statements except the remuneration paid to them and the number of employees getting compensation beyond certain amount per annum.

But there is nothing to prohibit the companies to attach information about the worth of human resources and the results of their performance during the accounting period in notes or schedules.

The following are the general considerations in the working of the HR concept by organizations.

1. Only internal human organization (employees) is considered. External organizations like customers are not considered.

2. All categories of employees are included. The value of employee potential services is considered.

3. HR value is worked out on certain standardized formula developed by experts.

4. A 12% discount rate is adopted.

5. Employees are classified according to age and pay scales under six categories—executives, supervisors, supporting technical staff, skilled artisans, unskilled and semi-skilled workers and clerical staff.

6. Weighted average is calculated for each group on information of total number of employees at each incremental stage and in each grade.

7. Future number of employees is worked out on the basis of general promotion policy.

8. Employee considerations include direct and indirect benefits.

HRM and HRA is now followed by most of the medium and large scale companies in India as there is awareness of the benefits in terms of Revenue, productivity, flexibility in skill development and so on. What used to be a designation like ‘Personnel Manager’ is now ‘Human Resources Manager’ and the manager can grow up to Director’s level in some companies. That is the importance bestowed by companies for the Human Resources function.

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  • gaurav

    hi sir

    tell me about h r accounting in banks/insurance sector

  • DGK


  • I want to have formula on HR ACCOUNTING i.e. how HR ACCOUNTING is done in Medium Sized organisation.