HIMACHAL PRADESH

NATIONAL
LAW UVIVERSITY

ORGANIZATIONAL BEHAVIOUR
AND
ORGANIZATIONAL PSYCHOLOGY

DEPARTMENT OF MANAGEMENT

Submitted to:- Submitted by:-

I would also like to thank the H.P. National Law University to provide ample
amount of resources and books in library which assessed me in doing my studies
on this particular topic. I would also like to thank my family for constant support
and motivation and my friends and classmates for providing their aid whenever I
needed it.

Lastly I would like to thank almighty god for blessing me with good health which
made everything possible
TABLE OF CONTENT: -
Acknowledgement

Introduction………………………………………………………………………1

Development of HRA…………………………………………………………….2

Definitions of HRA……………………………………………………………….3

Methods of HRA………………………………………………………………….4

Objectives of HRA………………………………………………………………..5

Conclusion………………………………………………………………………...6

Bibliography………………………………………………………………………7
Introduction: -
“Well experienced, imaginative and sincere
employees are the most important asset of a
business” is a very fact stated by late Shri J.R.D. Tata
as human is the only alive factor for an organization
which brings all the elements of the production
together to generate maximum output.1 The
employees of any organization come under ‘human
resource’ which needs proper management as in the
present era the physical assets of many organizations
are of less importance as compared to human capital.
There are many investments which an organization
incurs in maintaining a qualitative human resource.
Human resource accounting is a process of managing, understanding and making a report of the
investments which an organization has to incur in maintaining it’s human asset. It helps to
develop new managerial decision making, effectiveness of management, it also prevents
ineffecient use of human resources, it helps to increase human asset productivity, helps in
increasing morale of employees, it helps in increasing job satisfaction among the employees,
improves interorganizational communication and builds creativity among them.

This process also helps to determine short and long term priorities of an organization and assists
the management department in making plans to manage the human resource more effeciently to
genetare maximum output.

1
HPNLU Organizational Behaviour Ana Organizational Psychology classnotes.
Development of HRA :-
HRA being a new field, still it’s development has passed many satges which are relevant and is a
very old concept as according to the history of HRA. The development HRA can be broadly
classified into two stages:-

First satge :

The time period of this stage was 1960 to 1966, the development in this time period mainly due
to the intrest in HRA and the derivation of basic concept of HRA from the co related bodies of
theory. The first and foremost reason for the development of HRA arised from many sources,
such as from the economic theory of human capital, it was the concern of organizational
psychologists for leadership effectiveness, the new perspective which were formed about human
resource accounting, and a concern arising about human being an important asset for an
organization. The development in this era was due to these prevainling factors and it helped in
raising a concern and understanding the value of human as an important asset of organization.2

Second stage :

The time period for this stage of development was from 1966 to 1971. The researches during the
secon satge of development of HRA was done by Roger Hermanson who was a Ph.D. candidate
at Michigan State University. He focused on the problem of measureing the value of human
assets as an element of goodwill when they have not been purchased. The research for the second
stage focused on the development of assessing the validity of models which can be used to
measure the cost of human resource cost and its value. That was also a time of research which
helped to formulate the effective uses of HRA as a tool for the professionals of human resource,
various managers in the organization etc.3

These were the two stages of development which raised the importance of HRA and helped to set
effective measures for the proper cost evaluation of the cost of manageing human as a resource.

Definitions of HRA :
2
Eric G. Flamholtz, Human Resource Accounting-advances in concepts, methods and application, page1

3
Same as 2.
“A term used to describe a variety of proposals that seek to report and emphasize the importance
of human resources – knowledgeable, trained and loyal employees in a company earning process
and total assets.” 
- Davidson and Roman L Weel

“Human resource accounting is the measurement of the cost and value of the people for the
organisation.” 
- Eric Flamholtz of university of California, Los Angeles 
 
Human Resource Accounting is the process of identifying and measuring data about human
resources and communicating this information to interested parties.” 
- American Accounting Society Committee on HRA 

“Human Resource Accounting is an attempt to identify and report investments made in human
resources of an organisation that are presently not accounted for in conventional accounting
practice. Basically it is an information system that tells the management what changes over time
are occurring to the human resource in the business.” 
- Woodruff 
These are various definitions of HRA given by various management experts and committees
which stated that HRA is an art of recording and presenting the work of human resource in the
book of accounts of an organization.
Methods of HRA :-4
1. Historical cost method :
This method was developed by R. Lee Brummet, William C. Pyle and Flamholtz. This
method stated that the actual cost incurred on selecting, recruiting, training, developing
and placing the human resource of an organization are captalized and written off over the
expected useful life of human resources. It the the same procedure for human resource
asset as it is followed for any other physical asset of an organization.
Any amount spent on training and development of human resources if increases it effeciency
is capitalized. The amortization of human resource asset is also also done in the same way as
it is done for any other physical asset. Human assets are written off over its useful life. If the
asset is liquidated permanently then it is underwritten, off amount is charged to revenue
account. If the life is longer that what an organization expects then its amortization is
rescheduled.
Advantages :
o This method helps an organization in finding out return on investments done on
human resources.
o This method follows traditional accounting concept which includes the matching of
cost with revenue.
o This is a simple method and easy to understand and implement.
Limitations :
o This method takes into account a part of an employees acquisition cost ignoring the
agregate value of their potential service.
o It is dificult for an organization to determine the number of years an employee will be
in the firm.
o It is also dificult to determine the time period over which the effect of investment on
hunman resource wil prevail.

4
Methods of valuation of human resource accounting , http://www.whatishumanresource.com
2.Replacement cost method :
This method was developed by Rensis Likert and Eric G. Flamholtz. In this method the
cost of replaceing employees is used as the measure of company’s human resource.
Basically this method measures the cost of replaceing employees. This cost is calculated
with an assumption of creating another staff group which will again include the cost of
training, recruting, developing of new employees and it also includes the compensation
which are given to the replaced employees.
Advantages :
o This is a very realinstic method and has the tendency to adjust human value of
price trends in the economy.
o This method is oriented to present situations therefore it has advantage over other
methods.
Limitations :
o The exact replacement cost of an employee is dificult to be determined exactly.
o Different positions in the organizations or different persons who are used for
replacement comes at different cost so accurate estimate is not always drawn.
3. Opportunity cost method :
This method was established by Hc Kiman and Jones. This method determines the value
of an employee based on his alternative uses in various departments of a single
organization. This method determines the value of human resources bidding of
competitiveness in the same organization.
Advantages :
o This method give the organizatin an advantage of optional allocation of human
resources
o A quantitative base of planning is provided for evaluation and development of
human resource.
Limitations :
o It requires proper evaluation of the alternative use of employee in an organization
which is always not backed with sureity.
o Equally efficient employees are not always hired which curbs the efficient use of
this method.
Objectives of HRA :-
1. It helps to monitor the efficient use of human resources in an organization by
management department.
2. It helps the effective decision making of the management department related to the
human resource of the organization
3. It helps in overall analysis of human asset of an organization and helps to determine
wheather the asset is conserver, appreciated or deplited.
4. It helps an organization in decision making in many areas which include transfer,
retention, promotion etc.
5. It helps in total valuation of human resource and adding them to the book of accounts of
an organization.
Conclusion :-
The conclusion that can be infered from the above study is that HRA (Human Resource
Accounting) is an important tool for any organization because it is the method that helps the
organizations to determine it’s expendeture which is incured on the management of human
resource which is also an area of expendeture other than other factors of production. It lowers the
presence of uncertainity and change and it helps to determine the right person for the right
position in the organization. It helps to explore areas where new efforts are required and
determine where change is possible in terms of the human resources.

It also help to check the future corporate plans of an organization as it aims a expansion and
dertermination of human allocation. It helps an organization to evaluate the return which it is
getting on the investments made on human resource. This methods helps to communicate the
importance and worth of human resource to the public at large.

An organization, for efficient sustainability in the market requires to keep proper accounting and
this principle of human resource management helps in achiveing this objective. It also
determines the coming near future investments on human resource making an organization more
accurate and efficient in its work.
Bibliograpgy :-
o Md. Amirul Islam, Md. Kamruzzaman & Md. Redwanuzzaman, Human Resource Accounting:
Recognition and Disclosure of Accounting Methods & Techniques, Global Journal of
Management and Business Research Accounting and Auditing (2013)
o Methods of valuation of human resource accounting ,
http://www.whatishumanresource.com

o Eric G. Flamholtz, Human Resource Accounting-advances in concepts, methods and

o Manmohan Joshi, Human Resource Management