“How can I help?” is the catchphrase from the television series New Amsterdam. The series is about a medical director, Max Goodwin, who always finds ways to help his colleagues and patients. He inspired me to do my share as an accountant. I hope I will be a Max to help you understand how human resource should be treated literally and in quantitative terms in an organization.
Human resource has been referred to as an asset, and some even use the term human capital to emphasize that human resource is considered an investment. Conventionally, human resource is recorded as an expense, particularly as salaries expense, the amount that the employees receive every pay period.
But should human resource should be considered an asset, a capital or an expense in an organization? It cannot be all of the above. It is important to choose the exact classification to avoid double recording. In accounting, a transaction is recorded through a journal entry by identifying first which accounts are affected. I will be using the company’s perspective in explaining the classification of human resources in financial statements.
Is human resource an asset? An asset can have two meanings. In accounting terms, an asset is something (tangible or intangible) that has an economic value owned and controlled by the company. An asset can also mean anything that a person or any entity possesses that makes it valuable and useful (i.e., a surgeon’s hands, Tina Turner’s legs, J Lo’s buttocks, a singer’s voice, an employee’s unique skill, and ability).
The three components (control, ownership and economic value) should be present to be classified as an asset. Does the company have control over an employee? No, though some may say yes but strictly speaking, individuals have their own free will. Upon hiring, does the company have ownership of the employee? No. Does a person have an economic value? Economic value means having a price tag wherein something can be bought and sold at any given time with an exact monetary value. Can you buy or sell an individual? Legally, we know the answer is no. But employees are more than all these things. But in terms of accounting, human resource do not qualify as an asset.
Can human resources be considered as capital? Before we answer this question, I would like to distinguish between assets and capital, two terms that are often used interchangeably. Assets are what a company owns. These assets would arise or come from 1) a contribution of the owner and 2) purchase of the company through payment of cash, or by incurring a liability. Capital is any contribution made by the owner(s) of the business. Here lie the confusion and similarity because what an owner contributes is usually in cash or tangible property.
Let us say you paid for your employees’ training to update and improve their skills that your company would benefit from. Would this be considered now as your investment, therefore an asset? Would you own this skill? Would you be at liberty to use it any time and as long as you want? No, the skill would belong to the employee no matter how large the amount you put into acquiring the new skill. In your books, you paid for an expense. Expenses are products or services that you use only for a particular (accounting) period. You will use the employees’ skills only for each period; hence, it is treated as an expense.
Do we, therefore, accept the traditional way of recording human resources as part of operating expenses? Does the compensation of the employees truly tell us the whole story of human resources?
I always associate accounting with simply telling the business’s story by journalizing what transpired in the business’s operations and summarizing them through the financial statements. Each employee’s story is told (but not limited) through the Salaries Expense and Trainings & Seminars Expense accounts. Training & Seminars Expense is what you pay for a particular service provider who gave your employees training, hence, classified as an expense.
If you think that your human resource is of a greater value than the amount of the salaries (expense) they are receiving, then compensation given to them should be adjusted and not the accounting books. You can also prepare a schedule (computation) for each employee regarding their actual contribution to the company.
I used the company’s perspective as to how the company should reflect human resources in the financial statements. But from the employees’ standpoint, human resources take on a different perspective. Will they consider human resources an asset, a capital or an expense? All of the above is not an option. You need to choose just one. I can explain this angle and the impact of human resources on its valuation in a future article.
The author is a CPA and has vast experience in internal audit for SMEs. She is currently a part-time faculty of the Ramon V. del Rosario College of Business, De La Salle University. She finished both her Bachelor’s and MBA degree in the same university. She can be reached at [email protected].
The views expressed above are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.