Importance of Human Resource Accounting

Importance of HR Accounting

There is no challenging the importance or value of Human Resources in any organization. To quote Narayan Murthy founder of the ‘IT Giant’ Infosys

My assets are not the buildings, the business or foreign contact. My assets walk out of the gate every evening and I wait for them to come back to me the next morning.

Narayan murthy, infosys founder

Human Resource is the greatest asset of any organization, even yours. And like any other asset it needs to be accounted for.  This is even more so in the Service-based businesses. Where instead of a tangible product, there is an intangible product. An example: combing services you offer with the conduct and approach of your employees becomes of greater importance. Human Resource Accounting (HR Accounting) may be a new term for a lot of small businesses. Some of you entrepreneurs, may even view your employees as assets. Few small business owners realize the real tangible cost obtaining these assets. Also those expenses that go along with maintaining the “asset” to ensure a long and loyal life.

Wow! That sounds like a spy novel or worse a little cold hearted. But in the name of business success, sometimes it’s best to remove the emotional element. Plus, at the end of the day, your employees can provide a competitive advantage. While also adding to your profitability. This is precisely where HR Accounting comes into play.

Broadly speaking HR Accounting has two sides. On one side, it involves measuring the costs and investments associated with hiring employees, employee development and employee retention. While on the other, involves quantifying the economic value of your employees.

Internal Perspective

From the inside, HR Accounting primarily supports top level management to do a cost-benefit review regarding their HR decisions. A lot of financial resources are necessary for acquiring, nurturing and retaining employees. Therefore, reinforcing the why behind the need for HR Accounting.

For instance, often HR executives need to chose between hiring talented individuals with the necessary qualifications from outside. While still providing the required training to an employee on the inside. HR Accounting can help tackle these issues. While also performing functions like recruitment, selection, training and development, motivation and performance appraisal of the employees.

External Perspective  

The impact of HR Accounting from an external view, HR Accounting helps investors make rational and logical decisions. Especially when they are assessing the total worth of an organization. The explanation to this is pretty simple. We need to remember traditional business accounting treats Human Resources as expenditure in their income statements in any current year. When an investor reviews your expenditures, they will see how your business views your employees. Are they assets and are they showing in your financial reports as such.

As a small business owner, are you seeking investors? If so, you need to discuss the possibility moving your employee expenditures. Consider treating them like any other physical assets and capitalizing it over its expected useful life. This will allow your final balance sheet to show a more accurate number. Since following traditional accounting practices, the expenditures may be overstated and assets are understated. Each business’ financial situation is unique, and yours is no different. Therefore before changing any accounting practices be sure to speak with your certified public accountant.

HR Accounting is a relatively new approach to accounting and a way to financially embrace the importance of HR. With today’s competitive environment, this approach to HR is becoming an essential tool for the long term success of any organization, big or small. Depending on the anticipated growth of your business, you may want to begin considering the including this practice. As it may, just be, the key for your long term financial health of your business.

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