Meaning of Fund Flow Statement:

A fund flow statement is a statement in summary form that indicates changes in terms of financial
position between two different balance sheet dates showing clearly the different sources from which
funds are obtained and uses to which funds are put.
It summarizes the financing and investing activities of the enterprise during an accounting period.
By depicting all inflows and outflows of fund, the statement shows their net impact on working
capital of the firm.
If the total of inflows is greater than the outflows, the excess goes to increase in working capital. If
there is deficit of funds during a particular accounting period, the working capital is impaired. So
fund flow statement is an important tool for working capital management.
Some definitions of financial experts are given for the clear conception of fund flow
statement:
According to R. N. Anthony:
The funds flow statement describes the sources from which additional funds were derived and the
uses to which these funds were put.
Roy A. Fouke defines fund flow statement as a statement of sources and application of funds is
a technical device designed to analyse the changes in the financial condition of a business
enterprise between two dates.
Thus, the fund flow statement reveals the volume of financial transactions and explains the flow of
funds taking place within a business during a particular period of time and its effect on the net
working capital. It is not a substitute for either the Profit and Loss Account or the Balance Sheet,
but it is an useful supplement to them.
It describes the sources from which funds are obtained and the uses of these funds, in a condensed
form.

Objectives of Fund Flow Statement:

Some of the important objectives of preparing fund flow statement are:
1. Fund flow statement reveals clearly the changes in items of financial position between two
different balance sheet dates showing clearly the different sources and applications of funds. Thus,
it summarizes the financing and investing activities of the enterprise.
2. It also reveals how much of the total funds is being collected by disposing of fixed assets, how
much from issuing shares or debentures, how much from long-term or short-term loans, and how
much from normal operational activities of the business.
3. It also provides information about the specific utilisation of such funds i.e., how much has been
used for acquiring fixed assets, how much for redemption of preference shares, debentures or shortterm loans as well as payment of tax, dividend etc.
4. It helps the management in depicting all inflows and outflows of funds which cause a change in
working capital of a business organisation.

5. The projected fund flow statement helps management to exercise budgetary control and capital
expenditure control in the enterprise.
Management uses fund flow statement for judging the financial and operating performance of the
business.
Importance of Fund Flow Statement:
The importance of fund flow statement may be summarised:
1. Analyses Financial Statements:
Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an
enterprise. Fund flow analysis shows the changes in the financial position between two balance
sheet dates. It provides details of inflow and outflow of funds i.e., sources and application of funds
during a particular period.
Hence it is a significant tool in the hands of the management for analysing the past, and for
planning the future. They can infer the reasons for imbalances in the uses of funds in the past and
take corrective measures for the future.
2. Answers Various Financial Questions:
Fund flow statement helps us to answers various financial questions such as:
(a) How much fund flowed into the business?
(b) How much of these funds were provided by the operations?
(c) What are the other sources of funds?
(d) How were these funds used?
(e) Why was there less/more amount of net working capital at the end of the period than at the
beginning?
(f) Why were the dividends not larger?
(g) How was the purchase of fixed assets financed?
(h) Where have the net profits gone?
(i) How were the loans repaid?
3. Rational Dividend Policy:
Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to
inadequate working capital. In such circumstances, fund flow statement shows the working capital
position of a firm and helps the management to take policy decisions on dividend etc.
4. Proper Allocation of Resources:
Financial resources are always limited. So it is the duty of the management to make its proper use.
A projected fund flow statement enables the management to take proper decision regarding
allocation of limited financial resources among different projects on priority basis.

5. Guide to Future Course of Action:

The future needs of the fund for various purposes can be known well in advance from the projected
fund flow statement. Accordingly, timely action may be taken to explore various avenues of fund.
6. Proper Managing of Working Capital:
It helps the management to know whether working capital has been effectively used to the
maximum extent in business operations or not. It depicts the surplus or deficit in working capital
than required. This helps the management to use the surplus working capital profitably or to locate
the resources of additional working capital in case of scarcity.
7. Guide to Investors:
It helps the investors to know whether the funds have been used properly by the company. The
lenders can make an idea regarding the creditworthiness of the company and decide whether to
lend money to the company or not.
8. Evaluation of Performance:
Fund flow statement helps the management in judging the financial and operating performance of
the company.
Limitations of Fund Flow Statement:
Despite its various advantages, the fund flow statement suffers from certain limitations:
1. Historical Nature:
The information used for the preparation of the fund flow statement is essentially historical in
nature. It does not estimate the sources and application of funds for the near future.
2. Structural Changes Not Disclosed:
The fund flow statement does not disclose the structural changes in financial relationship in a firm.
In other words, it does not reveal shifts among items making up the current assets and current
liabilities. It does not tell us whether any loss of working capital has unduly weakened the financial
position or not.
3. Not Foolproof:
The fund flow statement is prepared from the data provided in the balance sheet and profit and loss
account. Hence, the defects in financial statements will be carried over to the fund flow statement
also.
4. Ignores Non-Fund Items:
As fund flow statement ignores non-fund items, it becomes a crude device compared to income
statement and balance sheet.
5. Not Relevant:
A study of changes in cash (i.e., cash flow statement) is more relevant than a study of changes in
funds for the purpose of managerial decision-making.
General Rules:
We know, working capital (WC) = Current Assets (CA) Current Liabilities (CL) or, WC = CA CL
From the above equation, we may deduce

(i) An increase in CA or a decrease in CL Causes an increase in WC

(ii) A decrease in CA or an increase in CL Causes a decrease in WC
(iii) A simultaneous increase in CA and CL or a simultaneous decrease in CA and CL will have no
effect on WC.
A flow of funds takes place only if a transaction involves one current account (CA or CL) and one
Non-current account (NCA or NCL).
From above the following general rules can be formed:
(i) Transactions which involve only current accounts (CA or CL) do not result in a flow of funds.
(ii) Transactions which involve only Non-current accounts (NCA or NCL) do not result in a flow of
funds.
(iii) Transactions which involve one current account (CA or CL) and one Non-current account (NCA
or NCL) results in a flow of funds.
Preparation of Fund Flow Statement:
Generally, two comparative balance sheetsone at the beginning and the other at the end of the
periodare used for preparing a fund flow statement. In addition, a summarised income statement
comprising non-fund or non-operating items and a statement of retained earnings or at least
material information from these statements are required in order to find out fund from operations.
Additional information regarding change in non-current accounts like plant and machinery,
building, share capital, debentures etc., if available, will sharpen the firms financial profile as
revealed by the fund flow statement.
The fund flow analysis involves the preparation of two statements:
(a) Statement or Schedule of Changes in Working Capital and
(b) Statement of Sources and Application of funds.
1. Statement or Schedule of Changes in Working Capital:
The primary purpose of a fund flow statement is to explain the net change in working capital, it will
be better to prepare first the schedule of changes in working capital before preparing a fund flow
statement.
The Schedule or Statement of changes in working capital is a statement that compares the change
in the amount of current assets and current liabilities on two balance sheet dates and highlights its
impact on working capital.
The format of this statement is:

2. Fund Flow Statement:

After preparing the schedule of changes in working capital, the next step is to prepare the Fund
Flow Statement to find out the different sources and applications of funds. While preparing this
statement the emphasis is given on the changes in the fixed assets and fixed liabilities. The
statement may be prepared either in T form or in Vertical form.
A proforma of each of them is given:

Notes:
(1) Either of the two will appear in the Fund Flow Statement.

(2) Either of the two will appear in the Fund Flow Statement.
(3) Payment of dividend and tax will appear as an application of funds only when these items are
appropriation of profits and not current liabilities

Meaning of Cash Flow Statement:

A cash flow statement is a statement of changes in the financial position of a firm on cash basis.
It reveals the net effects of all business transactions of a firm during a period on cash and explains
the reasons of changes in cash position between two balance sheet dates.
It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during a
particular period and their net impact on the cash balance.
According to Khan and Jain:
Cash Flow statements are statements of changes in financial position prepared on the basis of
funds defined as cash or cash equivalents.
The Institute of Cost and Works Accountants of India defines Cash Flow statement as a statement
setting out the flow of cash under distinct heads of sources of funds and their utilisation to
determine the requirements of cash during the given period and to prepare for its adequate
provision.
Thus, a cash flow statement is a statement which provides a detailed explanation for the changes in
a firms cash balance during a particular period by indicating the firms sources and uses of cash
and, ultimately, net impact on cash balance during that period.
Features of Cash Flow Statement:
The features or characteristics of Cash Flow Statement may be summarised in the following
way:
1. It is a periodical statement as it covers a particular period of time, say, month or year.
2. It shows movement of cash in between two balance sheet dates.
3. It establishes the relationship between net profit and changes in cash position of the firm.
4. It does not involve matching of cost against revenue.
5. It shows the sources and application of funds during a particular period of time.
6. It records the changes in fixed assets as well as current assets.
7. A projected cash flow statement is referred to as cash budget.
8. It is an indicator of cash earning capacity of the firm.
9. It reflects clearly how financial position of a firm changes over a period of time due to its
operating activities, investing activities and financing activities.

Objectives of Cash Flow Statement:

Cash Flow Statement is prepared to fulfill some objectives.
Some of the main objectives of Cash Flow Statement are:
1. It shows the cash earning capacity of the firm.
2. It indicates different sources from which cash been collected and various purposes for which
cash has been utilised during the year.
3. It classifies cash flows during the period from operating, investing and financing activities.
4. It gives answers to various perplexing questions often encountered by management, such as why
the firm is unable to pay dividend instead of making enough profit? Why is there huge idle cash
balance in spite of loss suffered? Where have the proceeds of sale of fixed assets gone? etc.
5. It helps the management in cash planning and control so that there are no shortage or surplus of
cash at any point of time.
6. It evaluates the ability of the firm to meet obligations such as loan repayment, dividends, taxes
etc.
7. A prospective investor consults the cash flow statement to ensure that his investment gets regular
returns in future.
8. It discloses the reasons for differences among net income, cash receipts and cash payments.
9. It helps the management in taking capital budgeting decisions more scientifically. 10. It ensures
optimum use of funds for the maximum benefit of the enterprise.
Utility or Importance of Cash Flow Statement:
Cash Flow Statement is useful for short-term planning and control of cash. A business entity needs
sufficient amount of cash to meet its various obligations in the near future such as payment for
purchase of fixed assets, payment of debts, operating expenses of the business etc.
It helps the financial manager to make a cash flow projection for the immediate future taking the
data relating to cash inflows and cash outflows from past records. As such, it becomes easy for him
to know the cash position which may either result in a surplus or a deficit one. Thus, cash flow
statement is another important tool of financial analysis for the management.
Its main advantages are:
1. Evaluation of Cash Position:
It is very helpful in understanding the cash position of a firm. Since cash is the basis for carrying
on business operations smoothly, the cash flow statement is very useful in evaluating the current
cash position of the business.
2. Planning and Control:
A projected cash flow statement enables the management to plan and coordinate the financial
operations properly. The financial manager can know how much cash is needed, from where it will
be derived, how much can be generated internally, and how much could be obtained from outside.
3. Performance Evaluation:

A comparison of actual cash flow statement with the projected cash flow statement will disclose the
failure or success of the management in managing cash resources. Deviations will indicate the need
for corrective actions.
4. Framing Long-term Planning:
The projected cash flow statement helps financial manager in exploring the possibility of repayment
of long-term debts which depends upon the availability of cash.
5. Capital Budgeting Decision:
A projected cash flow statement also helps the management in taking capital budgeting decisions.
6. Liquidity Position:
Liquidity position of a firm refers to its ability to meet short-term obligations such as payment of
wages and other operating expenses etc. From cash flow statement the financial manager is able to
understand how well the firm is meeting these obligations.
At the same time the ability of the firm in cash earning can be known from cash flow statement. As
a matter of fact, a firms profitability is ultimately dependent upon its cash earning capacity.
7. Answers to Different Questions:
Cash flow statement is able to explain some questions often encountered by the financial manager
such as, why is the firm not able to pay dividend in spite of making huge profit? Why there is huge
cash balance in spite of loss etc.
Limitations of Cash Flow Statement:
Cash Flow Statement is, no doubt, an important tool of financial analysis which discloses the
complete story of cash management. The increase inor decrease ofcash and reasons thereof, can
be known, However, it has its own limitation.
These limitations are:
1. Since cash flow statement does not consider non-cash items, it cannot reveal the actual net
income of the business.
2. Cash flow statement cannot replace fund flow statement or income statement. Each of them has
a separate function to perform which cannot be done by the cash flow statement.
3. The cash balance as disclosed by the projected cash flow statement may not represent the real
liquid position of the business since it can be easily influenced by the managerial decisions, by
making certain payments in advance or by post ponding payments.
4. It cannot be used for the purpose of comparison over a period of time. A company is not better off
in the current year than the previous year because its cash flow has increased.
5. It is not helpful in measuring the economic efficiency in certain cases e.g., public utility service
where generally heavy capital expenditure is involved

Meaning of Ratio Analysis:

Ratio analysis refers to the analysis and interpretation of the figures appearing in the financial
statements (i.e., Profit and Loss Account, Balance Sheet and Fund Flow statement etc.).
It is a process of comparison of one figure against another. It enables the users like shareholders,
investors, creditors, Government, and analysts etc. to get better understanding of financial
statements.
Khan and Jain define the term ratio analysis as the systematic use of ratios to interpret the
financial statements so that the strengths and weaknesses of a firm as well as its historical
performance and current financial conditions can be determined.
Ratio analysis is a very powerful analytical tool useful for measuring performance of an
organisation. Accounting ratios may just be used as symptom like blood pressure, pulse rate, body
temperature etc. The physician analyses these information to know the causes of illness. Similarly,
the financial analyst should also analyse the accounting ratios to diagnose the financial health of
an enterprise.
Generally, ratio analysis involves four steps:
(i) Collection of relevant accounting data from financial statements.
(ii) Constructing ratios of related accounting figures.
(iii) Comparing the ratios thus constructed with the standard ratios which may be the
corresponding past ratios of the firm or industry average ratios of the firm or ratios of competitors.
(iv) Interpretation of ratios to arrive at valid conclusions.
Advantages of Ratio Analysis:
Ratio analysis is widely used as a powerful tool of financial statement analysis. It establishes the
numerical or quantitative relationship between two figures of a financial statement to ascertain
strengths and weaknesses of a firm as well as its current financial position and historical
performance. It helps various interested parties to make an evaluation of certain aspect of a firms
performance.
The following are the principal advantages of ratio analysis:
1. Forecasting and Planning:
The trend in costs, sales, profits and other facts can be known by computing ratios of relevant
accounting figures of last few years. This trend analysis with the help of ratios may be useful for
forecasting and planning future business activities.
2. Budgeting:
Budget is an estimate of future activities on the basis of past experience. Accounting ratios help to
estimate budgeted figures. For example, sales budget may be prepared with the help of analysis of
past sales.
3. Measurement of Operating Efficiency:
Ratio analysis indicates the degree of efficiency in the management and utilisation of its assets.
Different activity ratios indicate the operational efficiency. In fact, solvency of a firm depends upon
the sales revenues generated by utilizing its assets.

4. Communication:
Ratios are effective means of communication and play a vital role in informing the position of and
progress made by the business concern to the owners or other parties.
5. Control of Performance and Cost:
Ratios may also be used for control of performances of the different divisions or departments of an
undertaking as well as control of costs.
6. Inter-firm Comparison:
Comparison of performance of two or more firms reveals efficient and inefficient firms, thereby
enabling the inefficient firms to adopt suitable measures for improving their efficiency. The best way
of inter-firm comparison is to compare the relevant ratios of the organisation with the average ratios
of the industry.
7. Indication of Liquidity Position:
Ratio analysis helps to assess the liquidity position i.e., short-term debt paying ability of a firm.
Liquidity ratios indicate the ability of the firm to pay and help in credit analysis by banks, creditors
and other suppliers of short-term loans.
8. Indication of Long-term Solvency Position:
Ratio analysis is also used to assess the long-term debt-paying capacity of a firm. Long-term
solvency position of a borrower is a prime concern to the long-term creditors, security analysts and
the present and potential owners of a business. It is measured by the leverage/capital structure and
profitability ratios which indicate the earning power and operating efficiency. Ratio analysis shows
the strength and weakness of a firm in this respect.
9. Indication of Overall Profitability:
The management is always concerned with the overall profitability of the firm. They want to know
whether the firm has the ability to meet its short-term as well as long-term obligations to its
creditors, to ensure a reasonable return to its owners and secure optimum utilisation of the assets
of the firm. This is possible if all the ratios are considered together.
10. Signal of Corporate Sickness:
A company is sick when it fails to generate profit on a continuous basis and suffers a severe
liquidity crisis. Proper ratio analysis can give signal of corporate sickness in advance so that timely
measures can be taken to prevent the occurrence of such sickness.
11. Aid to Decision-making:
Ratio analysis helps to take decisions like whether to supply goods on credit to a firm, whether
bank loans will be made available etc.
12. Simplification of Financial Statements:
Ratio analysis makes it easy to grasp the relationship between various items and helps in
understanding the financial statements.
Limitations of Ratio Analysis:

The technique of ratio analysis is a very useful device for making a study of the financial health of a
firm. But it has some limitations which must not be lost sight of before undertaking such analysis.
Some of these limitations are:
1. Limitations of Financial Statements:
Ratios are calculated from the information recorded in the financial statements. But financial
statements suffer from a number of limitations and may, therefore, affect the quality of ratio
analysis.
2. Historical Information:
Financial statements provide historical information. They do not reflect current conditions. Hence, it
is not useful in predicting the future.
3. Different Accounting Policies:
Different accounting policies regarding valuation of inventories, charging depreciation etc. make the
accounting data and accounting ratios of two firms non-comparable.
4. Lack of Standard of Comparison:
No fixed standards can be laid down for ideal ratios. For example, current ratio is said to be ideal if
current assets are twice the current liabilities. But this conclusion may not be justifiable in case of
those concerns which have adequate arrangements with their bankers for providing funds when
they require, it may be perfectly ideal if current assets are equal to or slightly more than current
liabilities.
5. Quantitative Analysis:
Ratios are tools of quantitative analysis only and qualitative factors are ignored while computing the
ratios. For example, a high current ratio may not necessarily mean sound liquid position when
current assets include a large inventory consisting of mostly obsolete items.
6. Window-Dressing:
The term window-dressing means presenting the financial statements in such a way to show a
better position than what it actually is. If, for instance, low rate of depreciation is charged, an item
of revenue expense is treated as capital expenditure etc. the position of the concern may be made to
appear in the balance sheet much better than what it is. Ratios computed from such balance sheet
cannot be used for scanning the financial position of the business.
7. Changes in Price Level:
Fixed assets show the position statement at cost only. Hence, it does not reflect the changes in price
level. Thus, it makes comparison difficult.
8. Causal Relationship Must:
Proper care should be taken to study only such figures as have a cause-and-effect relationship;
otherwise ratios will only be misleading.
9. Ratios Account for one Variable:

Since ratios account for only one variable, they cannot always give correct picture since several
other variables such Government policy, economic conditions, availability of resources etc. should
be kept in mind while interpreting ratios.
10. Seasonal Factors Affect Financial Data:
Proper care must be taken when interpreting accounting ratios calculated for seasonal business.
For example, an umbrella company maintains high inventory during rainy season and for the rest of
year its inventory level becomes 25% of the seasonal inventory level. Hence, liquidity ratios and
inventory turnover ratio will give biased picture

Classification of Ratios:
The use of ratio analysis is not confined to financial manager only. There are different parties
interested in the ratio analysis for knowing the financial position of a firm for different purposes. In
view of various users of ratios, there are many types of ratios which can be calculated from the
information given in the financial statements.
The particular purpose of the user determines the particular ratios that might be used for financial
analysis. For example, a supplier of goods of a firm on credit or a banker advancing a short-term
loan to a firm, is interested primarily in the short-term paying capacity of the firm, or say in its
liquidity.
On the other hand, a financial institution advancing a long term credit to a firm will be primarily
interested in the solvency or long- term financial position of the concern. Similarly, the interests of
the owners (shareholders) and the management also differ. The shareholders are generally
interested in the profitability or dividend position of a firm while management requires information
on almost all the financial aspects of the firm to enable it to protect the interests of all the parties.

(A) Traditional Classification or Statement Ratios:

Traditional classification or classification according to the statement, from which these
ratios are calculated, is as follows:

(a) Balance Sheet or Position Statement Ratios:

Balance Sheet ratios deal with the relationship between two balance sheet items, e.g. the ratio of
current assets to current liabilities, or the ratio of proprietors funds to fixed-assets. Both the items
must, however, pertain to the same balance sheet. The various balance sheet ratios have been
named in the chart classifying statement ratios.
(b) Profit and Loss Account or Revenue/Income Statements Ratios:
These ratios deal with the relationship between two profit and loss account items, e.g., the ratio of
gross profit to sales, or the ratio of net profit to sales. Both the items must, however, belong to the
same profit and loss account. The various profit and loss account ratios, commonly used, are
named in the chart classifying statement ratios.
(c) Composite/Mixed Ratios or Inter Statement Ratios:
These ratios exhibit the relation between a profit and loss account or income statement item and a
balance sheet item, e.g., stock turnover ratio, or the ratio of total assets to sales. The most
commonly used inter-statement ratios are given in the chart exhibiting traditional classification or
statement ratios.
(B) Functional Classification or Classification According to Tests:
In view of the financial management or according to the tests satisfied, various ratios have
been classified as below:
(a) Liquidity Ratios:
These are the ratios which measure the short-term solvency or financial position of a firm. These
ratios are calculated to comment upon the short-term paying capacity of a concern or the firms
ability to meet its current obligations. The various liquidity ratios are: current ratio, liquid ratio and
absolute liquid ratio. Further to see the efficiency with which the liquid resources have been
employed by a firm, debtors turnover and creditors turnover ratios are calculated.
(b) Long-term Solvency and Leverage Ratios:

Long-term solvency ratios convey a firms ability to meet the interest costs and repayments
schedules of its long-term obligations e.g. Debt Equity Ratio and Interest Coverage Ratio. Leverage
Ratios show the proportions of debt and equity in financing of the firm. These ratios measure the
contribution of financing by owners as compared to financing by outsiders.

The leverage ratios can further be classified as:

(i) Financial Leverage,
(ii) Operating Leverage,
(iii) Composite Leverage.
(c) Activity Ratios:
Activity ratios are calculated to measure the efficiency with which the resources of a firm have been
employed. These ratios are also called turnover ratios because they indicate the speed with which
assets are being turned over into sales, e.g., debtors turnover ratio. The various activity or turnover
ratios have been named in the chart classifying the ratios.
(d) Profitability Ratios:
These ratios measure the results of business operations or overall performance and effectiveness of
the firm, e.g., gross profit ratio, operating ratio or return on capital employed. The various
profitability ratios have been given in the chart exhibiting the classification of ratios according to
test. Generally, two types of profitability ratios are calculated
(i) In relation to sales, and
(ii) In relation to investments.

Human Resource Accounting: Meaning, Definition, Objectives and Limitations!

Meaning:
Human resources are considered as important assets and are different from the physical assets.
Physical assets do not have feelings and emotions, whereas human assets are subjected to various

types of feelings and emotions. In the same way, unlike physical assets human assets never gets
depreciated.
Therefore, the valuations of human resources along with other assets are also required in order to
find out the total cost of an organization. In 1960s, Rensis Likert along with other social researchers
made an attempt to define the concept of human resource accounting (HRA).
Definition:
1. The American Association of Accountants (AAA) defines HRA as follows: HRA is a process of
identifying and measuring data about human resources and communicating this information to
interested parties.
2. Flamhoitz defines HRA as accounting for people as an organizational resource. It involves measuring the costs incurred by organizations to recruit, select, hire, train, and develop human assets.
It also involves measuring the economic value of people to the organization.
3. According to Stephen Knauf, HRA is the measurement and quantification of human organizational inputs such as recruiting, training, experience and commitment.
Need for HRA:
The need for human asset valuation arose as a result of growing concern for human relations
management in the industry.
Behavioural scientists concerned with management of organizations pointed out the
following reasons for HRA:
1. Under conventional accounting, no information is made available about the human resources
employed in an organization, and without people the financial and physical resources cannot be
operationally effective.
2. The expenses related to the human organization are charged to current revenue instead of being
treated as investments, to be amortized over a period of time, with the result that magnitude of net
income is significantly distorted. This makes the assessment of firm and inter-firm comparison
difficult.
3. The productivity and profitability of a firm largely depends on the contribution of human assets.
Two firms having identical physical assets and operating in the same market may have different
returns due to differences in human assets. If the value of human assets is ignored, the total valuation of the firm becomes difficult.
4. If the value of human resources is not duly reported in profit and loss account and balance sheet,
the important act of management on human assets cannot be perceived.
5. Expenses on recruitment, training, etc. are treated as expenses and written off against revenue
under conventional accounting. All expenses on human resources are to be treated as investments,
since the benefits are accrued over a period of time.
Objectives of HRA:
Rensis Likert described the following objectives of HRA:
1. Providing cost value information about acquiring, developing, allocating and maintaining human
resources.

2. Enabling management to monitor the use of human resources.

3. Finding depreciation or appreciation among human resources.
4. Assisting in developing effective management practices.
5. Increasing managerial awareness of the value of human resources.
6. For better human resource planning.
7. For better decisions about people, based on improved information system.
8. Assisting in effective utilization of manpower.
Methods of Valuation of Human Resources:
There are certain methods advocated for valuation of human resources. These methods include
historical method, replacement cost method, present value method, opportunity cost method and
standard cost method. All methods have certain benefits as well as limitations.
Benefits of HRA:
There are certain benefits for accounting of human resources, which are explained as follows:
1. The system of HRA discloses the value of human resources, which helps in proper interpretation
of return on capital employed.
2. Managerial decision-making can be improved with the help of HRA.
3. The implementation of human resource accounting clearly identifies human resources as valuable assets, which helps in preventing misuse of human resources by the superiors as well as the
management.
4. It helps in efficient utilization of human resources and understanding the evil effects of labour
unrest on the quality of human resources.
5. This system can increase productivity because the human talent, devotion, and skills are considered valuable assets, which can boost the morale of the employees.
6. It can assist the management for implementing best methods of wages and salary administration.
Limitations of HRA:
HRA is yet to gain momentum in India due to certain difficulties:
1. The valuation methods have certain disadvantages as well as advantages; therefore, there is
always a bone of contention among the firms that which method is an ideal one.
2. There are no standardized procedures developed so far. So, firms are providing only as additional
information.
3. Under conventional accounting, certain standards are accepted commonly, which is not possible
under this method.
4. All the methods of accounting for human assets are based on certain assumptions, which can go
wrong at any time. For example, it is assumed that all workers continue to work with the same
organization till retirement, which is far from possible.

5. It is believed that human resources do not suffer depreciation, and in fact they always appreciate,
which can also prove otherwise in certain firms.
6. The lifespan of human resources cannot be estimated. So, the valuation seems to be unrealistic