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Contemporary Accounting

Notes Locating the real cause of low return on investment, that is whether it is due
to improper or under-utilisation of physical assets or human resource of
both.
2. A financial analyst is interested in understanding and assessing the inner strength of
the firm. Such inner strength does not merely depend on the physical assets owned
and possessed by the firm. In case the human resources, specially the managerial
resources at the disposal of the firm are impartially and systematically valued and
disclosed in the financial statements, it will be a valuable information for persons
interested in making long-term investment in the firm.

3. The Human Resource Accounting helps individual employees in improving their
performance and bargaining power. It makes each of them conscious of the
contribution that he is making towards the betterment of the firm vis-à-vis the
expenditure incurred by the firm on him.

Self Assessment

Fill in the blanks:

4. HRA is essentially a tool to facilitate better planning and ……………….based on the
information regarding actual HR costs and organisational returns.
5. The kind of …………. that needs to be managed systematically depends upon the purpose
for which HRA is being used by an organisation.
6. Information on ……………generates awareness regarding the actual cost of turnover and
highlights the need for efforts by the management towards retention of manpower.

7. The Human Resource Accounting helps individual employees in improving their
performance and ………………...

6.3 Need and Scope of HRA

According to Likert (1971), HRA serves the following purposes in an organisation:
1. It furnishes cost/value information for making management decisions about acquiring,
allocating, developing, and maintaining human resources in order to attain cost-
effectiveness.
2. It allows management personnel to effectively monitor the use of human resources.
3. It provides a sound and effective basis of human asset control, that is, whether the asset is
appreciated, depleted or conserved.
4. It helps in the development of management principles by classifying the financial
consequences of various practices.
Basically, HRA is a management tool that is designed to assist senior management in
understanding the long-term cost and benefit implications of their HR decisions so that better
business decisions can be taken. If such accounting is not done, then the management runs the
risk of taking decisions that may improve profits in the short run but may also have severe
repercussions in future. For example, very often organisations hire young people from outside
on very high salaries because of an immediate business requirement. Later on, however, they
find that the de-motivating impact of this move on the existing experienced staff has caused
immense long-term harm by reducing their productivity and by creating salary distortions
across the organisational structure.

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