Introduction
The phrase “our people are our greatest asset” is often used to emphasize the importance of people within any organization. This is true in all sectors, whether public or private, and regardless of the organization’s size or scope. The challenge of measuring and quantifying human capital has been an ongoing debate in accounting and finance. Human capital is a valuable asset to an organization and must be accounted for to accurately reflect its value. This paper will discuss the proper accounting treatment of investment in human capital, the definition of an asset, whether trained employees meet that definition, and what the accounting treatment would be if the value of qualified employees could be determined.
Accounting Treatment of Investment in Employee Training
The correct accounting method for investments in human capital, like employee training, is influenced by the type of training and the organization’s structure. This is in accordance with the matching principle, which states that costs should be matched with the related revenue in the same period (Gatti & Islam, 2022). By expensing the cost of employee training, the cost is spread across the same period in which the benefit is expected to be received.
Generally speaking, training expenses should be capitalized if the cost is expected to generate economic benefits for the organization for more than one year. This capitalized amount should be amortized over the period during which the economic benefits will be derived from the training. Training costs can encompass both direct and indirect expenses associated with the training, including wages paid to trainers, materials used during the training, and the cost of facilities utilized for the training (Gatti & Islam, 2022).
Additionally, any travel and other related expenses incurred during the same period as the training should be covered. Suppose the training is expected to generate economic benefits within one year. The cost should be expensed and recorded as an operating expense when the training occurs.
Although the investment in human capital is expensed on the income statement, long-term benefits may be associated with the investment. These benefits include increased productivity, improved morale, and reduced turnover (Greene, 2021). Accounting rules do not allow companies to record these long-term benefits on the income statement. However, companies must consider these benefits when evaluating the effectiveness of the investment in human capital.
Overall, investments in human capital, such as employee training, should be accounted for as an expense in the current period in which the training occurred. Although employee training may have long-term benefits, the associated expenses can be recorded on the income statement, and the long-term benefits can be evaluated separately.
Trained Employees as Assets
The definition of an asset is an item of value that is owned by an individual or organization that can be used to generate future economic benefits. Examples of assets include cash, investments, real estate, inventory, equipment, and art (Greene, 2021). This definition also applies to human capital, as trained employees can generate future economic benefits for the organization.
Employees who have received training qualify as assets, as they can provide economic benefits to the organization. They can help increase efficiency and productivity, reduce costs, and enhance customer satisfaction (Greene, 2021). However, the value of trained employees is not easily determined, as it depends on the individual’s skill set, experience, and other factors.
Value of Trained Employees and Their Accounting Treatment
If the worth of trained employees could be assessed, the appropriate accounting method would vary based on the type of training and the organization’s structure. On the balance sheet, it would be classified as an intangible asset, and expenses related to personnel education would be recognized in the period in which they were incurred (Hamadamin & Atan, 2019). This could be specified in the notes to the financial and income statements.
The cost of training should be capitalized and amortized if it provides economic advantages for more than one year, over the time span in which the advantages can be gained (Gatti & Islam, 2022). If the training yields economic benefits for less than one year, the cost must be expensed and recorded as an operating expenditure in the period during which the training took place. Lastly, any variances in the value of the trained employees should be noted in the financial and income statements.
Conclusion
To conclude, the appropriate accounting approach for investments in human capital, such as employee training, varies depending on the nature of the training and the organization’s framework. The definition of an asset applies to trained employees as they have the potential to generate future economic benefits for the organization. If the worth of trained employees could be measured, the correct accounting treatment would likewise depend on the kind of training and the organization’s structure. Understanding the proper accounting treatment of human capital is crucial for accurately reflecting the value in the organization.
References
Gatti, R. & Islam, A. M. (2022). The human capital of firms and the formal training of workers. World Bank.
Greene, R. J. (2021). The most important asset: Valuing human capital. Taylor & Francis Limited.
Hamadamin, H.H. & Atan, T. (2019). The impact of strategic human resource management practices on competitive advantage sustainability: The mediation of human capital development and employee commitment. Sustainability, 11(20), 5782. Web.