Human Resource Accounting in the Information Age: Is Valuation and Balance Sheet Classification Necessary in Order to Understand the True Financial Condition of an Enterprise?

Date of Submission


Document Type


Degree Name

Master of Science in Accounting




Robert McDonald


Human capital --United States --Accounting, Corporations --United States --Accounting

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1996 no.3


The goal of financial accounting has always been to provide useful and relevant

information about an enterprise to investors and others users for decision making

purposes. The traditional system of accounting, which reports the cost of material and labor, overlooks the larger part of today’s product costs, namely research and

development costs, the costs of providing services, and most important, the cost of

intellectual or human assets. Today the success of modem enterprise depends to a great extent upon the continual development and management of the skills and knowledge base of the people in an organization’s employ. A favorite and frequently used cliché for the president’s letter in corporate annual reports is, “Our employees are our most important, our most valuable asset.” However, the reader, looking through the remainder of a report asks himself, “what is the value of this most important asset that is responsible for a firm’s earnings?,” “where is the value located in the report?” and “what return is this asset earning for the company?” For the reader of a corporate annual report, no answers to these questions are found. It is for this reason that proponents of human resource accounting feel that the costs of acquiring, training, and developing employees should be recognized and recorded on an organization’s balance sheet so that managers, investors, and other users of financial information can make intelligent decisions about a company’s past and future performance.

This paper attempts to answer the question of necessity in classifying employees as human assets, placing a value on them and recording them in the financial statements of an organization as a means to provide information about the true financial condition of an enterprise. To do this, this paper examines the theory of human resource accounting, addresses and evaluates the theory’s good points and short comings, attempts to measure the benefit of human asset knowledge to investors and managers by presenting the results of an experiment performed by Nabil Elias, and finally presents one corporation’s modern day answer to this seemingly unresolvable issue.