Human Resources & Inflation Accounting.docx

• Inflation Accounting refers to the process of adjusting financial statements to reflect the changes in the purchasing power of money due to inflation.
• In traditional (historical cost) accounting, assets and liabilities are recorded at their original cost, ignoring the effect of changing price levels.
• During inflation, this leads to understatement of assets and profits, as the real value of money falls.
Hence, Inflation Accounting aims to show the true financial position and performance of a business during inflationary conditions.

1. UNIT – II: INFLATION ACCOUNTING AND HUMAN RESOURCE
ACCOUNTING (THEORY)
PART – A: INFLATION ACCOUNTING
1. MEANING OF INFLATION ACCOUNTING
Inflation Accounting refers to the process of adjusting financial
statements to reflect the changes in the purchasing power of
money due to inflation.
In traditional (historical cost) accounting, assets and liabilities are
recorded at their original cost, ignoring the effect of changing price
levels.
During inflation, this leads to understatement of assets and profits,
as the real value of money falls.
Hence, Inflation Accounting aims to show the true financial position and
performance of a business during inflationary conditions.
2. DEFINITION
According to the International Accounting Standards Committee (IASC):
“Inflation Accounting is a system of accounting which shows the effect of
changing price levels on the financial statements of a company.”
3. NEED FOR INFLATION ACCOUNTING
1.To show true value of assets and liabilities.
2.To avoid overstatement of profits during inflation.
3.To ensure fair dividend distribution based on real profit.

2. 4.To make accurate managerial decisions.
5.To ensure capital maintenance in real terms.
4. APPROACHES TO PRICE LEVEL ACCOUNTING
There are two main approaches:
(A) Current Purchasing Power (CPP) Method)
Also called General Price Level Accounting.
All items in financial statements are adjusted using a price index
(e.g., Consumer Price Index).
Historical cost figures are restated in terms of current purchasing
power.
Formula:
RestatedValue=HistoricalValue×(CurrentPriceIndex/
HistoricalPriceIndex)Restated Value = Historical Value × (Current Price
Index / Historical Price
Index)RestatedValue=HistoricalValue×(CurrentPriceIndex/HistoricalPriceInd
ex)
Example:
If machinery was purchased for ₹1,00,000 when index = 200, and current
index = 400,
Restated value = 1,00,000 × (400 / 200) = ₹2,00,000.
Features:
Adjusts all items using a general price index.
Simple and easy to apply.
Focuses on purchasing power of money, not replacement cost.

3. (B) Current Cost Accounting (CCA) Method)
Assets and expenses are shown at current replacement cost (what it
would cost to replace today).
It measures profit after maintaining capital in real terms.
Steps:
1.Restate non-monetary assets at current replacement cost.
2.Compute depreciation based on current cost.
3.Determine profit after maintaining capital.
Example:
If machinery purchased at ₹1,00,000 five years ago costs ₹2,00,000 now,
depreciation should be based on ₹2,00,000.
Features:
Reflects current cost of assets and goods.
Provides realistic profit figures.
More suitable for decision-making.
5. TYPES OF INFLATION ACCOUNTING METHODS
Type Description
1. Current Purchasing Power
(CPP)
Adjusts items using general price index.
2. Current Cost Accounting
(CCA)
Adjusts items to current replacement cost.
3. Hybrid Method Combination of CPP and CCA methods.
4. Replacement Cost Focuses only on replacement cost of fixed

4. Type Description
Accounting assets.
6. ADVANTAGES OF INFLATION ACCOUNTING
1.True and fair view of financial statements.
2.Avoids overstatement of profits.
3.Helps in realistic depreciation and asset valuation.
4.Facilitates better management decisions.
5.Ensures capital maintenance in real terms.
6.Improves comparability between different periods.
7. DISADVANTAGES OF INFLATION ACCOUNTING
1.Complexity in calculation and adjustments.
2.Lack of uniform price indices for all industries.
3.Subjectivity in selecting index and replacement cost.
4.Not easily understood by investors and stakeholders.
5.Costly and time-consuming to implement.
8. DIFFERENCE BETWEEN HISTORICAL COST ACCOUNTING AND
INFLATION ACCOUNTING
Basis
Historical Cost
Accounting
Inflation Accounting
Basis of
valuation
Original cost Current price level

5. Basis
Historical Cost
Accounting
Inflation Accounting
Depreciation Based on historical costBased on current cost
Profit
Overstated during
inflation
Realistic profit shown
Complexity Simple Complex
Objective
Record actual
transactions
Reflect true value and
purchasing power
PART – B: HUMAN RESOURCE ACCOUNTING (HRA)
1. MEANING
Human Resource Accounting is the process of identifying, measuring,
recording, and reporting the value of human resources in the financial
statements of an organization.
It recognizes that employees are valuable assets, and their knowledge,
skills, and abilities contribute significantly to organizational success.
2. DEFINITION
According to American Accounting Association (AAA):
“Human Resource Accounting is the process of identifying and measuring
data about human resources and communicating this information to
interested parties.”
According to Eric Flamholtz:

6. “Human Resource Accounting involves accounting for people as an
organizational resource. It includes measuring the costs incurred to recruit,
select, train and develop employees and their economic value to the
organization.”
3. OBJECTIVES OF HUMAN RESOURCE ACCOUNTING
1.To measure the cost and value of human resources.
2.To provide information for decision-making regarding human
assets.
3.To assist in effective human resource utilization.
4.To help management in planning and control of HR policies.
5.To show the true worth of an organization.
6.To improve employee morale and motivation.
4. VALUATION OF HUMAN RESOURCES
Several methods have been suggested to measure the value of human
assets. They can be divided into cost-based and value-based methods.
A. COST-BASED METHODS
1.Historical Cost Method:
oActual cost incurred on recruitment, training, and development
of employees.
oTreated as asset and amortized over employee’s expected service
period.
2.Replacement Cost Method:

7. oValue based on cost of replacing existing employees with similar
talent.
3.Opportunity Cost Method:
oThe value of an employee is based on the opportunity cost, i.e.,
the value of best alternative use.
B. VALUE-BASED METHODS
1.Present Value of Future Earnings Method:
oFuture earnings of employees are estimated and discounted to
present value.
2.Expected Realisable Value Method:
oValue is based on the contribution expected from employees
during their service life.
3.Economic Value Method:
oThe economic value of HR is determined based on their
contribution to organizational goals.
5. TYPES OF HUMAN RESOURCE ACCOUNTING
Type Description
1. Monetary HRA
Values employees in financial terms using cost/value
methods.
2. Non-Monetary
HRA
Focuses on qualitative aspects such as skill,
knowledge, and morale.
3. Cost-based HRAMeasures recruitment and training cost.

8. Type Description
4. Value-based
HRA
Measures employee’s economic value to the
organization.
6. ADVANTAGES OF HRA
1.Improves managerial decision-making.
2.Shows true value of organization’s assets.
3.Helps in effective HR planning and control.
4.Improves employee morale as they are recognized as valuable
assets.
5.Facilitates better cost-benefit analysis of HR development.
6.Assists in replacement and training decisions.
7. PROBLEMS AND LIMITATIONS OF HRA
1.No standard method of valuation.
2.Subjectivity in measuring human value.
3.Uncertain future of employees (resignation, death, etc.).
4.Ethical issues in valuing humans as assets.
5.Non-acceptance by accounting authorities.
6.Difficulties in amortization and disclosure.
8. RESPONSIBILITY ACCOUNTING
Meaning:

9. Responsibility Accounting is a system of accounting in which different
sections or departments of an organization are made responsible for
specific activities or results.
It helps to measure the performance of each responsibility center.
Features:
Establishes responsibility centers (cost, revenue, profit, investment).
Compares actual performance with budgeted performance .
Fixes accountability for deviations.
Types of Responsibility Centers:
1.Cost Centre – Responsible for cost control only.
2.Revenue Centre – Responsible for revenue generation.
3.Profit Centre – Responsible for both cost and revenue (profit).
4.Investment Centre – Responsible for profits and capital employed.
Advantages:
Promotes decentralization.
Facilitates performance evaluation.
Improves cost control and accountability.
Helps in better budgeting and coordination.
Limitations:
Requires accurate data collection.
Difficulty in fixing responsibility in shared functions.
May lead to inter-departmental conflicts.
9. SUMMARY

10. Concept Meaning Key Focus Objective
Inflation
Accounting
Adjusts accounts for
price level changes
Current cost /
price index
Show true value
and profit
Human Resource
Accounting
Measures and
reports value of
employees
Cost and value of
HR
Effective HR
utilization
Responsibility
Accounting
Assigns
responsibility to
departments
Performance
measurement
Control and
accountability