Human resource accounting is the process of measuring and reporting the human resources of an organization. It is the process of providing information about individuals and groups of individuals, within an organization to decision-makers both inside and outside the organization.
Human Resource Accounting is required to be implemented in the organization for the following reasons:
The Balance Sheet and Profit and Loss Account of a firm cannot show true and fair view of its affairs unless all resources and assets including human resources are properly shown.
The expenditure on hiring, training and acquiring experience and efficiency on the human element is huge amount these days. Firms spend a large amount on the training and development of the skilled workers, the technical personnel, the accountants and the managers. It is essential that the true position regarding the nature of this expenditure and its role is prominently highlighted for the benefit of all concerned.
Management is required to take important decisions regarding the appointment, promotion, training, internal transfers, work distribution, merit rating, job evaluation, layoff, discharge, etc. in respect of its personnel. In the absence of proper accounting data, sometimes the decisions are faulty and the organization suffers on this account.
The employee also is well-informed about the investment made by the employer on him and his true value to the organization, so that he adopts an enlightened attitude when faced with certain important decisions regarding himself and react properly.
Strikes, lockouts, go-slow, work to rule, absenteeism, high labor turnover rate, etc. which plague industry are natural in a system where the human resource is not properly valued and prominently shown in the books. Wastage of human resource and time due to the above would be checked to a large extent if its cost to the different parties is calculated. Such information could also form the basis of wage agreements.
Comprehensive manpower inventory is also essential for manpower planning projections regarding the future requirements of manpower and their development within the organization or hiring from outside will be possible only if proper records are maintained.
In the context of the country as a whole, while there is no scarcity of unskilled workers and the inter-firm mobility is also low, there is a relative scarcity of skilled and technical manpower like the technicians and engineers, the accountants, the managers, etc. Precise estimates of the value of these scarce human resources is essential for their systematic development.