Human Assets on the Statement of Financial Position
Human assets are the value that people add to a company through their skills, expertise, and competencies. Any organization needs human resources since they enable a business to function and prosper. However, it is a complicated decision to list people as assets in the statement of financial position.
It is crucial to remember that, in addition to the skills and knowledge that employees contribute, a company’s human assets also include its employees’ creativity, innovation, and distinctive viewpoints. These intangible traits may inspire innovative ideas and better operational procedures, eventually giving the firm a competitive edge. In any case, these factors further complicate the problem of determining the worth of human resources.
The traditional definition of an asset for inclusion on the statement of financial position is a resource controlled by the entity due to past events and from which the entity expects to receive future financial advantages. Employees help a firm succeed financially in the future. Still, they do not easily fit into this definition (Rumyantseva et al., 2020).
It is important to note that, in addition to the traditional definition of an asset, this definition has been largely created with tangible assets in mind. Because they are simpler to quantify and manage, tangible assets like machinery or buildings better fit this concept. Intangible assets, such as human assets, which do not easily fit into this conventional framework, are now receiving more attention due to how business is changing, particularly in the information economy.
First, personnel do not fall under the company’s control like actual assets do. Employees’ potential future economic contributions are difficult to guarantee due to their flexibility to leave the company anytime. Second, it is impossible to put a monetary value on human assets because of the subjectivity of their contributions and the impossibility of calculating the advantages they will bring in the future (Mähönen, 2020).
In addition to the earlier discussion about control over employees, it is critical to consider the importance of employee motivation and engagement. Even if a company could theoretically control its employees, a lack of engagement or drive might significantly reduce the value that these employees bring to the company. This emphasizes even more how difficult it is to view people as assets.
Furthermore, using people as assets raises ethical questions. It might be claimed that treating people like commodities and reducing them to nothing more than economic units violates the concepts of human dignity and respect. Concerning ethical issues, it is also important to note that treating people like assets may dehumanize the corporate atmosphere (Mähönen, 2020). Employee job happiness, productivity, and turnover rates may all suffer if they believe they are being treated more like commodities than as unique people.
Although human resources are valuable to a company, they do not meet the usual criteria for being included in the statement of financial condition because of issues with management, measurement, and ethics. Because of the difficulty in determining their value, the lack of control over them, and the ethical implications of acknowledging people as assets, it is difficult to incorporate human assets in the statement of financial position, despite their evident value. Employees’ value to the firm could be greatly diminished by a lack of motivation or engagement, even when a corporation could theoretically govern its workforce.
Explanation of Terms
Assets
Assets are resources that a corporation owns or controls and are anticipated to yield future financial advantages. They may be observable, such as structures and equipment, or intangible, such as patents and trademarks. Extending on the idea of assets, it is critical to remember that these resources represent a company’s lifeblood. They enable a business to function and generate revenue (Saidu & Gidado, 2018). The successful management of tangible and intangible assets is one of the most critical components of a company’s strategic planning and operational effectiveness.
Historical Cost
According to this accounting rule, an asset should be valued at its original cost, which is the sum paid at the time of purchase. The historical cost concept provides the foundation for conservatism in financial reporting and its basic definition (Shanti et al., 2023). It stops assets from being reported at speculative values, giving a more trustworthy and impartial picture of a company’s financial situation.
Going Concern
This accounting principle depends on a company’s ongoing existence. Businesses might postpone some of their prepaid expenses to subsequent accounting periods. In addition to its basic definition, a going concern has consequences for the valuation of assets and liabilities (Saidu & Gidado, 2018). If a company is not expected to continue as a going concern, assets may need to be assessed at liquidation values rather than operational values.
Double Entry
Every transaction in this accounting system impacts at least two accounts. Each debit entry must have an equal and opposite credit entry. The double-entry approach offers a system of checks and balances and a way to record transactions (Rumyantseva et al., 2020). It aids in maintaining the correctness of a company’s financial records by ensuring that debits and credits balance.
Matching
The matching of costs and revenues is a fundamental accounting principle. It ensures that all expenses and costs related to producing revenue are recorded during the same period as the revenue. People must understand the matching principle to use the accrual basis of accounting. It ensures that revenues and expenses are recorded during the appropriate periods, which helps ensure that a company’s profitability is properly assessed.
Depreciation
The expense of a tangible item is spread out during this process. It symbolizes the asset’s degradation, wear, or obsolescence. Depreciation has tax repercussions in addition to its basic definition. Businesses can minimize their tax liability by deducting the cost of depreciating assets from their taxable income.
It is also crucial to remember that multiple depreciation methods can be employed depending on the asset’s characteristics and the company’s accounting procedures (Shanti et al., 2023). These techniques include falling balance, which recognizes a higher depreciation charge in the early years of the asset’s life, and straight-line depreciation, which spreads the asset’s cost evenly across its useful life. The choice of depreciation method can greatly impact an organization’s reported profits and tax obligations.
Rights Issue
Businesses can acquire capital by granting existing shareholders the option to buy additional shares at a reduced price. A rights issue can be used to maintain the control of current shareholders in addition to obtaining money (Saidu & Gidado, 2018). It prevents diluting the ownership stake of current shareholders by first offering shares to them.
Additionally, it is critical to stress that a rights issue is a democratic way to raise money because it gives current owners precedence to purchase additional shares in proportion to their current holdings. As a result, they can continue to own a share of the business. Nevertheless, existing shareholders’ ownership stakes may be diluted if they decide not to exercise their rights.
Company
Refers to a firm run and governed by a legal body created by a group of people. This company may operate in various industries, such as commercial, industrial, or service-based. A firm has social and economic responsibilities and is a legal entity. It can boost the economy, produce goods or services that satisfy societal demands, and create jobs.
It is significant to remember that a corporation has its own rights and obligations in addition to those of its owners or managers (Rumyantseva et al., 2020). This encompasses the capacity for contracting, property ownership, and both suing and being sued. A corporation’s owners are not held personally accountable for the debts and liabilities of the business because of the limited liability protection offered by corporate law. A big advantage of beginning a business is this.
Corporate Governance
This refers to the guidelines, customs, and procedures for managing and directing businesses. It entails weighing the competing interests of a company’s numerous stakeholders. Corporate governance includes ethical behavior, corporate responsibility, and regulations and procedures. Effective corporate governance can improve a company’s standing and dependability with stakeholders.
It is crucial to remember that corporate governance also includes the composition and operation of the board of directors, the responsibilities and interactions between the company’s management, board, shareholders, and other stakeholders, as well as the objectives for which the business is governed (Mähönen, 2020). Good corporate governance should facilitate effective monitoring and provide the board and management with the right incentives to pursue goals that are in the company’s and shareholders’ best interests. This will encourage businesses to use their resources more effectively. In recent years, the concept of corporate governance has expanded to include problems of corporate social responsibility, such as attempts to promote diversity and inclusion, fair trade principles, and environmental stewardship.
Prudence
This accounting principle calls for accountants to proceed with care when making decisions in the face of ambiguity. Prudence ensures that neither liabilities nor expenses are understated, nor are assets and revenue inflated. Prudence is a virtue that contributes to the accuracy of financial statements (Shanti et al., 2023). It prevents overestimation of assets and income and underestimation of liabilities and expenses, presenting a more accurate image of a company’s financial status.
Not-for-Profit Organizations and Profit
Partially true is the statement that “Not-for-profit organizations are not interested in earning a profit.” Although not-for-profit organizations’ main objective is not to make money for their shareholders, they nevertheless need to make enough money to pay their operational costs and carry out their mission. In relation to the previous remark on not-for-profit organizations, it is crucial to emphasize that while they do not seek to make profits that will be distributed to owners or shareholders, they do seek to make surpluses. The business returns these surpluses to advance its goals and mission (Mähönen, 2020). This could increase its services, make infrastructural improvements, or set aside money now to meet future demands.
Like for-profit companies, accounting and finance are essential to non-profit organizations. They aid these organizations’ inefficient resource management, long-term planning, and accountability to their supporters, members, and the general public. Additionally, they assist non-profit organizations in measuring and reporting their performance in carrying out their missions and complying with legal regulations.
Accounting and finance play an expanded role in not-for-profit organizations by providing openness and accountability, both of which are essential for preserving stakeholder trust (Saidu & Gidado, 2018). It is important for stakeholders like donors, volunteers, and the communities the organization serves to understand how it manages its resources. The organization’s financial management and reporting effectiveness can show that it is functioning in the clients’ best interests.
Consequently, even if not-for-profit businesses do not prioritize increasing earnings, they require a surplus to ensure their sustainability and fund their missions. The use of accounting and finance is essential to achieving these goals. While not-for-profit organizations may not have a traditional profit-driven mindset, they need to manage their funds wisely to remain viable and fulfill their missions (Shanti et al., 2023). This entails earning enough revenue to pay running costs, making plans for future requirements, and proving accountability to stakeholders. These characteristics heavily rely on accounting and finance services, demonstrating their significance for both for-profit and non-profit companies.
Differentiation Between Concepts
Financial Accounting and Management Accounting
Creating financial statements for external users like creditors and investors is a financial accounting component. It adheres to established regulations and accepted accounting practices. On the other hand, management accounting entails creating in-depth reports and forecasts for the organization’s managers. It is not constrained by any formal standards and was created to satisfy the particular requirements of the management of the business.
The audiences and time frames for these two types of accounting differ, further highlighting the gap between financial and management accounting (Rumyantseva et al., 2020). External stakeholders use financial accounting to make judgments about investments, lending, and regulatory compliance based on the company’s historical performance. On the other hand, management accounting is prospective and utilized internally to make strategic decisions regarding the future of the organization.
Equity Shares and Preference Shares
Common shares, usually called equity shares, indicate ownership in a business and grant shareholders the opportunity to vote. They still retain a claim to the business’s resources and profits. As opposed to equity shares, preference shares have a greater claim on the company’s assets and profits. They typically have no voting rights and pay a fixed dividend.
The risk and return trade-off is something to keep in mind when discussing equity and preference shares (Shanti et al., 2023). As the last to acquire any remaining assets in the case of insolvency, equity stockholders are most at risk. They could, however, stand to gain the most if the business does well. On the other hand, preference shareholders are less risky since they have a greater claim to the company’s assets and profits, but their return is limited to the fixed dividend rate.
Profit and Cash
Profit is the monetary gain that results when the revenue from business activities exceeds the costs and taxes required to maintain the activity. It is a concept in accounting that is decided by accounting principles. Contrarily, the term “cash” describes the company’s cash on hand or in the bank. Even though a business is lucrative, it may still run out of cash if the earnings are not converted into cash.
To further clarify the distinction between profit and cash, it is important to know that profit is an accounting measure considering non-cash elements like depreciation and accruals. However, cash represents the actual cash inflows and outflows from operating, investing, and financing enterprises. Because of this, a business may appear prosperous on paper yet still experience cash flow issues (Saidu & Gidado, 2018). Effective financial management requires that people comprehend how these two metrics differ.
Conclusion
In conclusion, understanding a firm’s financial status and activities requires a comprehension of human resources, accounting principles, not-for-profit organizations, and numerous financial terminologies. Human resources are valuable, but they do not fit the standard definition of an asset that would allow them to be listed on the statement of financial position. Not-for-profit organizations need to practice sound financial management even if they are not driven by profit. Finally, when making financial decisions, it is critical to comprehend the distinctions between financial and management accounting, equity and preference shares, and profit and cash.
Reference List
Mähönen, J. (2020) “Integrated Reporting and Sustainable Corporate Governance from European Perspective,” Accounting, Economics, and Law, 10(2). Web.
Rumyantseva, A. et al. (2020) Corporate Financial Control Transformation in the Conditions of Digitalization. Web.
Saidu, S. and Gidado, S. (2018) “Managerial Ownership and Financial Performance of Listed Manufacturing Firms in Nigeria,” International Journal of Academic Research in Business & Social Sciences, 8(9). Web.
Shanti, Y.K., Kusumawardhany, S.S. and Sudarmadi, S. (2023) “Understanding Accounting In Supporting Reports Quality Finance At Pt. Pasanggrahan Citra Persada,” Jurnal Puan Indonesia, 4(2), pp. 287–300. Web.