HRA - Journal, Is, BS, Lecture Sheet

HRM-5503: Human Resource Accounting
Topics:
--Journal Entries
--Income Statement
--Balance Sheet
Instructor:
Md. Hafij Ullah
Assistant Professor
Department of Business Administration
International Islamic University Chittagong
HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

HRM-5606: Human Resource Accounting
Program: MBA, DBA, IIUC.
# Steps in Accounting for Human Resources
1. The first step is to determine what HR costs are to be capitalized. This is
essentially a matter of classifying HR costs into assets and expense components.
2. The second step is to amortize the cost incurred by an organization on its
employees for recruiting, hiring, orienting, familiarizing, training and developing
them based on career/service duration.
3. The third step is to appreciate the value of employees every year at a particular
percentage rate. This step is needed because human resources appreciate in value
because of their experience over years. The more an employee ages, the more
he/she gains experience and value.
4. The fourth step is to adjust human asset accounts. When a material change in
organization employees expected working life occurs (because of any of the
factors, namely, bad health, early retirement plan, employee turnover,
technological obsolescence), the employee asset needs to be adjusted.
5. The fifth and final step is to present organizations manpower value as an asset
value in the financial statements.
# Costs to be capitalized for HR Valuation:
1. Social Costs including all the expenses incurred on the employees by their
parents/guardians and the State/Society from their intra-uterine life to the point of
entry into service.
2. Acquisition costs including recruitment, selection, hiring and placement costs
of employees borne by the employing organization.
3. Orientation and on-the-job training costs including salaries paid to the
employees during their orientation period.
4. Formal training and development costs of employees borne by the employing
organization.
5. Separation costs of employees (payment in case of early retirement,
termination, or resignation), costs due to reduced efficiency, cost of vacant
position during the search for a new employee, etc.
6. Costs incurred by the employing organization on the female gravid (pregnant)
employees.
7. Reward for extra ordinary performances and academic attainments.
8. Extra ordinary health costs.
All the maintenance expenses, that is, payments made to employees in the form of
salary, bonus, pension, gratuity, contribution to provident fund etc. need not be taken into
account under the approach. These have to be debited to revenue account as expense. In
this connection, it is important to note that every organization has lower grade workers
Md. Hafij Ullah, Assistant Professor, DBA, IIUC, hafij_1980@yahoo.com Contact: 01818177051.

whose employment is rather casual or temporary and not permanent; hence these are not
to be shown as human asset.
# Recording of Costs Related to Human Resources:
1. For recording Social costs/cost of experience gained from other
organizations
Human Resources Investment by Society A/c----------Dr.
Human Resources Reserve A/c--------------------------Cr.
2. For recording Acquisition costs/ Orientation and on-the-job training
costs/ Formal training and development costs of employees/ Separation
costs of employees/ Costs incurred by the employing organization on the
female gravid (pregnant) employees/ Reward for extra ordinary
performances and academic attainments/ Extra ordinary health costs
Human Resources Investment by Organization A/c--------Dr.
Cash/Bank A/c-------------------------------------------Cr.
3. HR Maintenance Expenses
a) When payments are made for employees maintenance expenses
HR Maintenance Expenses A/c---------Dr.

Cash A/c----------------------------------Cr.
b) When maintenance expenses are charged to profit and loss A/c
Profit and Loss A/c------------------Dr.

HR Maintenance Expenses A/c---------Cr.
4. Amortization of Manpower costs
a) To Record Amortization Expenses
Human Resources Amortization A/c--------Dr.

Human Resources Investment by Organization A/c---Cr.
b) To Charge Amortization Expenses to profit & loss A/c

Human Resources Amortization A/c--------Cr.
5. Writing down of social cost and other organizations cost of HR
Human Resources Reserve A/c----------------------Dr.
Human Resources Investment by Society A/c------Cr.
6. Adjustment for Turnover
Human Resources Reserve A/c----------------------Dr.
Human Resources Investment by Society A/c------Cr.
7. Other journal entries (upon turnover of employees) for loss of investment by
an organization
a) Loss on Turnover/Obsolescence of Employees A/c----Dr.
Human Resources Investment by Organization A/c-------Cr.
b) Profit & Loss A/c-----------------------Dr.
Loss on Turnover/Obsolescence of Employees A/c----Cr.
8. Reversal of Entry against Present Practice
Human Resources Investment by Organization A/c-------Dr.
Profit and Loss A/c-----------------------------Cr.

9. Recording of Gratuity, Pension on Retirement and Provident Fund
a) When provision is made for payment of gratuities in the hour of need

Provision for Gratuities A/c--------Cr.
b) When gratuities are paid to the retired employees
Provision for Gratuities A/c--------Dr.

Cash A/c-----------------------------------Cr.
10. Recording of Appreciation in the value of Employees (Due to increase
efficiency/ or inflation effect)
Human Resources Investment by Organization A/c----------Dr.
Human Resources Reserve A/c------------------------------Cr.
Example: 1
The following are the summary of transactions relating to Human Resources of Agrani
Bank Ltd. during 2009. Record the transactions in the books of account:
1. Social Costs at the beginning of 2009-------------Tk. 23,665.14 lakh
2. Rate of inflation---------------------------------------20%
3. Social costs for resigned/retired/terminated expired---Tk. 28.00 lakh
4. Banks investment at the beginning of 2009------------Tk. 618.43 lakh
5. Rate of appreciation in the value of employees---------2.43%
6. Present overall efficiency of all the employees----------111.50% (increase 11.50%)
7. Banks share of costs for resigned/retired/terminated/expired
(Or separated) employees-------------------------------------Tk. 15.00 lakh
8. a) Acquisition costs---------------------------------------------Tk. 12.50 ,,
b) Orientation costs--------------------------------------------- Tk. 45.50 ,,
c) Training and development costs -------------------------- Tk. 58.00 ,,
d) Separation costs---------------------------------------------- Tk. 32.00 ,,
e) Rewards for extra-ordinary performances---------------- Tk. 15.25 ,,
f) Extra-ordinary health costs---------------------------------- Tk. 12.00 ,,
g) Investment for female gravid (pregnant) employees----- Tk. 17.00 ,,
(AODSFPH-Total of these costs-------------Tk. 192.25 lakh)
9. Amortization costs (on Banks Investment) on employees-------Tk. 59.19 lakh
10. Amortization costs (on Societys Investment) on employees---Tk.1,808.17 lakh
11. HR maintenance expenses paid (Salaries, allowances, PF etc.) Tk. 1,810.00 ,,
(Assume Capital = Tk. 4,000 lakh; Cash = Tk. 4,000 lakh)
Solution:
Agrani Bank Ltd.
Journal Entries
Date
Explanation
1
Human Resources Reserve A/c-----------------Cr.
Taka
23,665.14
Taka
23,665.14
(For the sum total of social costs incurred on the employees by their
parents/guardians and State/society to make them fit to work.)

4,733.03
4,733.03
(For giving inflationary effect to HR investment of Tk. 23,665.14 by

society @ 20%.)

3
Human Resources Reserve A/c---------------------------Dr.

Human Resources Investment by Society A/c-----Cr.
28.00
28.00
(A reversal entry for the social costs incurred on the obsolete and
retired personnel by their parents/guardians and state/society.)
4
(i)
Human Resources Investment by Bank A/c------------Dr.

Profit and Loss A/c---------------------------------Cr.
618.43
618.43
(A reversal by crediting to profit and loss A/c for AODSFPH costs

to show these as investment.)
(ii)

Human Resources Reserve A/c--------------------Cr.
123.69
123.69
(For giving inflationary effect to HR investment of Tk. 618.43 lakh

by bank @ 20%.))

18.03
18.03
(For appreciation in the value of banks investment AODSFPH costs

@2.43% because of their gaining experience and efficiency with the
passage of time (618.43+123.69)x 2.43%=Tk. 18.03 lakh.)

87.42
87.42
(For giving effect of increasing overall efficiency @ 11.50% on total

investment (618.43+123.69+18.03) = Tk. 87.42)
7
(i)
Loss on Turnover/Obsolescence of Employees A/c---Dr.

Human Resources Investment by Bank A/c---Cr.
15.00
15.00
(For the unamortized balance of Bank Investment in AODSFPH

costs for employees treated as turnover loss upon their
turnover/obsolescence.)
(ii)
Profit & Loss A/c-------------------------------------------Dr.

Loss on Turnover/Obsolescence of Employees A/c---Cr.
15.00
15.00

costs on the obsolete or retired personnel written off as banks loss.)

Bank/ Profit and Loss A/c-------------------------Cr.
192.25
192.25
(A reversal entry for cash paid by the bank on account of

AODSFPH costs for employees in the year 2009 already debited to
profit and loss A/c. The amount of cash being paid: 12.50+45.50+
58.00+32.00+17.00+15.25+12.00= Tk. 192.25.)
9
(i)
Human Resources Amortization A/c--------------------Dr.

Human Resources Investment by Bank A/c---------Cr.
59.19
59.19
(For HR amortization expenses charged to profit and loss A/c.)
(ii)
Profit and Loss A/c-----------------------------------------Dr.

Human Resources Amortization A/c--------------Cr.
59.19
59.19
(For the amount of HR investment by bank amortized during the

year 2009 Tk. 59.19.)
10
11
(i)
(ii)

Human Resources Investment by Society A/c--Cr.
(For the amount of HR investment by society written off during the
year 2009 Tk. 1,808.17.)
HR Maintenance Expenses A/c--------------------------------------Dr.
Cash A/c----------------------------------------------Cr.
Profit and Loss A/c----------------------------------------------------Dr.
HR Maintenance Expenses A/c--------------------Cr.
1,808.17
1,808.17
1,810.00
1,810.00
1,810.00
1,810.00

Agrani Bank Ltd.
Income Statement (For HR transactions only)
For the year ended 2009
Expenses
Taka
Income
HR Maintenance expenses-----------(Salaries, Allowances, Bonus, and
Provident Fund)
Loss on Turnover/ Obsolescence of
Employees---------------------------(unamortized balance of Bank
Investment in AODSFPH costs)
HR Amortization---------------
1,810.00
15.00
59.19
1,884.19
Taka
Human Resources Investment by

Bank A/c (Capitalization of costs on
HR by reversal entry)
Human Resources Investment by
Bank A/c----------------------
192.25
Net Loss from HR---------------
1,073.51
1,884.19
618.43
Agrani Bank Ltd.

Balance Sheet (For HR transactions only)
As on 31st December, 2009
Liabilities
Taka
Assets
HR Reserve-----------------23,665.14
(+) Inflationary effect------ 4,733.03
28,398.17
(-) Turnover loss------------ 28.00
28,370.17
(+) Effect of inflation,
Appreciation and
Skill-&-efficiency
On bank cost
(123.69+18.03+87.42)----- 229.14
28,599.31
(-) Reserve written-off
from Invest. By society 1,808.17
26,791.14
Capital-------------------------4,000.00
(-) Net Loss from HR------- 1,073.51
2,926.49
________
29,717.63
HR investment by society--23,665.14
(+) Effect of inflation------ 4,733.03
28,398.17
(-) Turnover loss (Social Cost) 28.00
28,370.17
(-) Written-off for invest. By
Society---------------1,808.17
HR Investment by Bank:
Opening Balance--------------- 618.43
Appreciation and
Skill-&-efficiency
On bank cost
(123.69+18.03+87.42)
229.14
847.57
(+) HR investment in 2009 ----192.25
1,039.82
(-) Amortization Expenses--- 59.19
980.63
(-) Turnover loss (Bank costs) 15.00
Cash---------------(4,000.00-1,810.00)
Taka
26,562.00
965.63
2,190.00
29,717.63

Example: 2
The following are the summary of transactions relating to Human Resources of Agrani Bank Ltd. during
2010. Record the transactions in the books of account:
1. Social Costs at the beginning of 2010-------------Tk. 26,562.00 lakh
Banks investment at the beginning of 2010------Tk. 965.63 lakh
Cash Balance at the beginning of 2010------------Tk. 2190.00 ,,
HR Reserve balance at the beginning of 2010----Tk. 26,791.14 lakh
Capital balance at the beginning of 2010----------Tk. 2,926.49 ,,
2. Rate of inflation---------------------------------------20%
3. Social costs for resigned/retired/terminated expired---Tk. 13.20 lakh (60% of 22 lakh)
4. Rate of appreciation in the value of employees---------2.75%
5. Present overall efficiency of all the employees----------105.22% (increase 5.22%)
(Or separated) employees------------------------Tk. 8.80 lakh (40% of Tk. 22 lakh)
7. a) Acquisition costs-----------------------------------------------Tk. 00 ,,
b) Orientation costs--------------------------------------------- Tk. 00 ,,
c) Training and development costs -------------------------- Tk. 00 ,,
d) Separation costs---------------------------------------------- Tk. 00 ,,
e) Rewards for extra-ordinary performances---------------- Tk. 00 ,,
f) Extra-ordinary health costs---------------------------------- Tk. 00 ,,
g) Investment for female gravid (pregnant) employees-----Tk. 8.50 ,,
8. Amortization costs (on Banks Investment) on employees-------Tk. 80.58lakh
9. Amortization costs (on Societys Investment) on employees---Tk. 2,056.89 lakh
Solution:
Date
1
2
(i)
2
(ii)
3
6
(i)
Agrani Bank Ltd.

Journal Entries
Explanation
Human Resources Investment Society A/c--------------Dr.
Cash A/c -----------------------------------------------------Dr.
Human Resources Reserve A/c-------------------Cr.
Capital A/c-------------------------------------------Cr.
society @ 20%.)
(For giving inflationary effect to HR investment of Tk. 965.63 lakh
by bank @ 20%.)
@ 2.75% because of their gaining experience and efficiency with
the passage of time (965.63+193.13) x 2.75%=Tk. 31.87 lakh.)
(For giving effect of increasing overall efficiency @ 5.22% on total
investment (965.63+193.13+31.87) = Tk. 62.15)
Taka
26,562.00
965.63
2190.00
Taka
26,791.14
2,926.49
5,312.40
5,312.40
193.13
193.13
13.20
13.20
31.87
31.87
62.15
62.15
8.80
8.80
(ii)
7
8
(i)
(ii)

Profit & Loss A/c-------------------------------------------Dr.
Cash A/c---------------------------------------------Cr.
(For cash paid for gravid female employees.)
Human Resources Investment by Bank A/c---------Cr.
year 2010 Tk. 80.58.)
year 2010 Tk.2,056.89.)
8.80
8.80
8.50
8.50
80.58
80.58
80.58
80.58
2,056.89
2,056.89
Agrani Bank Ltd.

Expenses
Taka
Income
Employees---------------------------8.80
(unamortized balance of Bank
80.58
Net Loss from HR--------------HR Amortization--------------89.38
Liabilities
Taka
89.38
89.38
Agrani Bank Ltd.

Taka
Assets
HR Reserve-----------------26,971.14
(+) Inflationary effect------ 5,312.40
32,103.54
(-) Turnover loss------------ 13.20
32,090.34
Appreciation and
Skill-&-efficiency
On bank cost
(193.13+31.87+62.15)
287.15
32,377.49
(-) Reserve written-off
from Invest. By society 2,056.89
30,320.60
Capital---------------------2,926.49.00
(-) Net Loss from HR------89.38
2,837.11
__________
33,157.71
HR investment by society-------26,562.00
(+) Effect of inflation----------- 5,312.40
31,874.40
(-) Turnover loss (Social Cost)
13.20
31,861.20
(-) Written-off for invest. By
Society--------------2,056.89
HR Investment by Bank:
Opening Balance------------------ 965.63
Appreciation and
Skill-&-efficiency
On bank cost
(193.13+31.87+62.15)
287.15
1,252.78
(+) HR investment in 2010-----8.50
1,261.28
(-) Amortization Expenses-----80.58
1,180.70
(-) Turnover loss (Bank costs)--8.80
Cash----------------------- (2,190.00- 8.50)
Taka
29,804.31
1,171.90
2,181.50
33,157.71

Example: 3
The following are the summary of transactions relating to Human Resources of Agrani Bank Ltd. during
2011. Record the transactions in the books of account:
1. Social Costs at the beginning of 2011---------------------Tk. 29,804.31 lakh
Banks investment at the beginning of 2011--------------Tk. 1,171.90 lakh
Cash Balance at the beginning of 2011--------------------Tk. 2181.50 ,,
HR Reserve balance at the beginning of 2011------------Tk. 30,320.60 lakh
Capital balance at the beginning of 2011------------------Tk. 2,837.11 ,,
2. Rate of inflation-----------------------------------------------21%
3. Social costs for incoming experienced employees-------Tk. 392.42 lakh
4. Other banks costs for incoming experienced employeesTk. 3.55 lakh
5. Social costs for resigned/retired/terminated expired---Tk. 27.00 lakh (60% of 45 lakh)
6. Rate of appreciation in the value of employees-----------3.00%
7. Present overall efficiency of all the employees------------115% (increase 15%)
(Or separated) employees----------------------Tk. 18.00 lakh (40% of Tk. 45 lakh)
9. a) Acquisition costs---------------------------------------------Tk. 0.03 lakh
b) Orientation costs--------------------------------------------- Tk. 16.00 ,,
c) Training and development costs -------------------------- Tk. 0.20 ,,
d) Separation costs---------------------------------------------- Tk. 00 ,,
e) Rewards for extra-ordinary performances---------------- Tk. 00 ,,
f) Extra-ordinary health costs---------------------------------- Tk. 00 ,,
g) Investment for female gravid (pregnant) employees-----Tk.4.30 ,,
(AODSFPH-Total of these costs-------------Tk. 20.53 lakh)
10. Amortization costs (on Banks Investment) on employees-------Tk. 104.49 lakh
11. Amortization costs (on Societys Investment) on employees---Tk.2,264.64 lakh
Solution:
Agrani Bank Ltd.
Journal Entries
Explanation
Date
Human Resources Investment Society A/c--------------Dr.
1
Cash A/c -----------------------------------------------------Dr.
Human Resources Reserve A/c-------------------Cr.
Capital A/c-------------------------------------------Cr.
2
(i)

(ii)

Taka
30,320.60
2,837.11
6,258.91
6,258.91

society @ 21 %.)
246.10
246.10
(For giving inflationary effect to HR investment of Tk. 1,171.90

lakh by bank @ 21%.)

392.42
392.42
(For the amount of social costs Tk. 43.42 lakh of 5 experienced SPOs
came from other bank and Tk. 349.00 lakh for 100 new recruits.)
Human Resources Investment by other Bank A/c----Dr.

Taka
29,804.31
1,171.90
2181.50
3.55
(For the amount of invested by other bank Tk. 3.55 lakh for 5
experienced SPOs came from other bank.)
3.55

5

27.00
27.00

42.54
42.54

@ 3% because of their gaining experience and efficiency with the
passage of time (1,171.90+246.10) x 3 %=Tk. 42.54 lakh.)

219.08
219.08
(For giving effect of increasing overall efficiency @ 15% on total

investment (1,171.90+246.10+42.54) = Tk. 219.08)
8
(i)

18.00
18.00

(ii)
Profit & Loss A/c-------------------------------------------Dr.

18.00
18.00


Cash A/c---------------------------------------------Cr.
20.53
20.53
(For the amount incurred by the bank as AODSFPH costs during the
year = 0.03+16.00+0.20+4.30= 20.53.)
10
(i)

Human Resources Investment by Bank A/c--------Cr.
104.49
104.49
(ii)

104.49
104.49

year 2011 Tk. 104.49.)
11

2,264.64
2,264.64

year 2011 Tk.2,264.64.)
Agrani Bank Ltd.

Expenses
Taka
Income
Employees---------------------------(unamortized balance of Bank
HR Amortization---------------
18.00
Net Loss from HR--------------------
Taka
122.49
122.49
104.49
122.49
10
Agrani Bank Ltd.

11

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HRM-5503: Human Resource Accounting

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

HR Maintenance Expenses A/c---------Dr.

Profit and Loss A/c------------------Dr.

Human Resources Amortization A/c--------Dr.

Profit and Loss A/c------------------Dr.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

Profit and Loss A/c------------------Dr.

Provision for Gratuities A/c--------Dr.

Human Resources Investment by Society A/c----------Dr.

(For giving inflationary effect to HR investment of Tk. 23,665.14 by

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

Human Resources Reserve A/c---------------------------Dr.

Human Resources Investment by Bank A/c------------Dr.

(A reversal by crediting to profit and loss A/c for AODSFPH costs

Human Resources Investment by Bank A/c------------Dr.

(For giving inflationary effect to HR investment of Tk. 618.43 lakh

Human Resources Investment by Bank A/c------------Dr.

(For appreciation in the value of banks investment AODSFPH costs

Human Resources Investment by Bank A/c------------Dr.

(For giving effect of increasing overall efficiency @ 11.50% on total

Loss on Turnover/Obsolescence of Employees A/c---Dr.

(For the unamortized balance of Bank Investment in AODSFPH

Profit & Loss A/c-------------------------------------------Dr.

(For the unamortized balance of Bank Investment in AODSFPH

Human Resources Investment by Bank A/c------------Dr.

(A reversal entry for cash paid by the bank on account of

Human Resources Amortization A/c--------------------Dr.

(For HR amortization expenses charged to profit and loss A/c.)

Profit and Loss A/c-----------------------------------------Dr.

(For the amount of HR investment by bank amortized during the

Human Resources Reserve A/c---------------------------Dr.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

Human Resources Investment by

Net Loss from HR---------------

Agrani Bank Ltd.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

Agrani Bank Ltd.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

(For the unamortized balance of Bank Investment in AODSFPH

Agrani Bank Ltd.

Agrani Bank Ltd.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

Human Resources Investment by Society A/c----------Dr.

Human Resources Investment by Bank A/c------------Dr.

(For giving inflationary effect to HR investment of Tk. 29,804.31 by

(For giving inflationary effect to HR investment of Tk. 1,171.90

Human Resources Investment by Bank A/c------------Dr.

Human Resources Investment by other Bank A/c----Dr.

HRM Major: Human Resource Accounting, Dept. of Business Administration, IIUC.

Human Resources Reserve A/c---------------------------Dr.

Human Resources Investment by Bank A/c------------Dr.

(For appreciation in the value of banks investment AODSFPH costs

Human Resources Investment by Bank A/c------------Dr.

(For giving effect of increasing overall efficiency @ 15% on total

Loss on Turnover/Obsolescence of Employees A/c---Dr.

(For the unamortized balance of Bank Investment in AODSFPH

Profit & Loss A/c-------------------------------------------Dr.

(For the unamortized balance of Bank Investment in AODSFPH

Human Resources Investment by Bank A/c------------Dr.

Human Resources Amortization A/c--------------------Dr.

(For HR amortization expenses charged to profit and loss A/c.)