Page 1 of 11
European Journal of Business &
Social Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 01
January 2019
Available online: https://ejbss.org/ P a g e | 41
A Critical Study of Human Resource Accounting and its
Importance in Indian Industries
Dr. Pramod Gupta, IET Group of Institutions
Mr. Anoop Venugopal,
Department of Management
Sunrise University, Alwar, (Rajasthan)
Abstract:
According to American Accounting Association, HRA is “the process of identifying and
measuring data about human resources and communicating this information to interested
parties”. HRA is similar in principle to the financial accounting, that is, just as financial
accounting reflects the costs of assets such as building and machinery, HRA shows human
resources as capital not as expenses. Thus, HRA shows the investment, the organization makes
in its people and how their values change over a period of time. HRA is a sophisticated way to
measure the effectiveness of personnel management activities and the use of people in an
organization.
Human Resource Accounting (HRA) is a new branch of accounting. It is based on the traditional
concept that all expenditure of human capital formation is treated as a charge against the revenue
of the period as it does not create any physical asset. But now a day this concept has changed and
the cost incurred on any asset (as human resources) should be capitalised as it yields benefits
measurable in monetary terms.
Key-Words: HRA, ROA, ROI, ICAI.
Introduction:
HRA was first developed by Sir William Petty in the year 1691. However the true research in
HRA began in 1960 by Rensis Likert, founder of the University of Michigan Institute of Social
Research and well known for his work on management styles and management theory (Likert
Page 2 of 11
European Journal of Business &
Social Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 01
January 2019
Available online: https://ejbss.org/ P a g e | 42
1961, 1967). He, along with faculty member R.Lee Brummet, and Ph.D., Candidates William
C.Pyle and Eric Flamholtz, worked on a series of research projects designed to develop concepts
and methods of accounting for human resources. Thus early work in HRA provided inspiration
for the development of HRA measurement models. In the late 60s‟ and early 70s‟, a number of
researchers proposed that the capital nature of certain human resource costs was recognized as
investments rather than as expenses, which was collectively known as HRA. According to Eric
G.Flamholtz the development of HRA is a systematic and detailed academic activity which
began in sixties.
Human resource accounting in India:
In India, HRA is still in the early stage of development. Even though HRA was introduced
before 1980s, it started gaining popularity in India after it was adopted and popularized by
Neyveli Lignite Corporation (NLC) and Bharat Heavy Electricals Limited (BHEL). Mahalingam
(2001 p.19) notes “Pundits of today, asset that while the other forms of capital including
material, equipment, tools and technology, only represent inert potentialities, it is human capital
that converts this potential and energies for the creation of wealth.”. The Indian Companies Act
does not provide any scope for furnishing any significant information about human resources in
financial statements. HRA has not been introduced so far in any legislation and thereby Human
Resources are not yet recognized as „assets‟ neither in the Balance sheet nor in the Annual
Report of many of the Public or Private companies in India. Even in the new Companies Act
2013, there is no specific provision regarding the accounting and reporting requirement of
Human Resource in Annual Report of Indian Companies. The Institute of Chartered Accountants
of India (ICAI) has issued Accounting Standard (AS) on various aspects of accounting but it is
not possible for ICAI to bring any exact accounting standard for measurement and reporting of
human resource of an organisation. This was the greatest drawback relating to HRA.
Methods of valuation of human resource accounting:
Page 3 of 11
European Journal of Business &
Social Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 01
January 2019
Available online: https://ejbss.org/ P a g e | 43
The methods or models suggested in the valuation of human resource are divided into three
categories 1) Monetary Methods 2) Economic Models and 3) Non Monetary Methods. These
Methods are as follows:
Objectives of HR Accounting:
The objective of HRA is not merely the recognition of the value of all resources used by the
organisation, but it also includes the management of human resource which will ultimately
enhance the quantity and quality of goods and services. The main objectives of HR Accounting
system are as follows:
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