Human Resource Accounting and Why You Need It
Since all significant development seems to be taking place in the service sector, the 21st century has been dubbed the century of the service industry. But can accountants accurately determine the value of the service sector and reflect that on the balance sheet of the business? Most businesses that operate in the service sector now recognize that their most valuable assets are their people, as earnings are based on per employee per hour billing model, and profitability is correlated with the value produced by the workforce. Therefore, steps must be taken to not only improve their human resources but also advance their values. The idea of human resource accounting (HRA), primarily defined by The American Accounting Association Committee on HRA for the service sector, has gained so much importance that businesses in many industries are now using it, and these reports are given a good amount of weightage when doing any company assessments.
What Is Human Resource Accounting?
HRA is essentially the science of methodically classifying, recording, and disclosing the company's human resources in its financial records. It is an accounting branch that is focused on identifying and quantifying data on the human resources employed by a business. Moreover, human resource accounting is a management tool that aids in providing information to top management in the form of reports for better decision-making, with a goal to develop and practice management strategies for reining in human resource activity. It is also accounting for and recognizing expenses associated with employees of an organization, along with costs incurred for recruitment, training, selection, etc.
Why You Need Human Resource Accounting?
As HRA reflects the potential of human resources in an organization in monetary terms, let's look at the primary benefits human resource accounting offers:
- Since conventional accounting does not provide the organization with information about its human resources, HRA is thought to be necessary in determining the strengths and weaknesses of an organization’s existing workforce, thus helping managers in achieving the organization's long-term goals.
- It is a tool for assessing the efficacy of the business's human resource policies. Additionally, it determines whether or not the return on investment is sufficient.
- Data from human resource accounting is helpful in making the best hiring decisions.
- Today's need of the hour is that the value of a company's workforce is disclosed in its financial accounts. Understanding management decision regarding human capital is crucial, and this is made feasible by how those decisions are reflected in the company's financial accounts.
The success of any corporate firm depends increasingly on human resources as a decision-making factor due to the globalization of business and services. As accounting's main purpose is to offer a reliable measurement and reporting system for making decisions, human resource accounting is more concerned about the decision-making part of accounting. That is to say, the goal of human resource accounting (HRA) is to gather information about a company's human resources, value them, and portray them as assets rather than just expenses.
Feel free to consult RSM UAE to discuss your accounting concerns. RSM is one of the world’s leading audit, tax, and advisory service networks, recognized for innovative solutions across the globe. RSM professionals can help undertake the granular analysis of the need for human resource accounting by your company.