Let’s assume that we have a small company with 10 employees and a director/owner (100%).
The company has a profit (before tax) of 200,000 USD a year.
The 10 employees earn (cost to the company) in total 500,000 USD. a year.
The owner pays himself 60,000 (cost to company) as a salary income a year.
The equity of the company is 600,000 (capital contributed and retained earnings) at the end of the year.
Could you make some more assumptions and tell me what asset we should include for human capital?
And what would be the counter entry for human capital (dual aspect accounting).
Coming up with the exact value of human capital is not easy. The underlying reason is
that of the unique characteristics of human capital. Human capital is multifaceted ideology
representing both potential asset and liability of an organization. Human capital is an intangible
asset that can be influenced but cannot be entirely controlled. Human capital can be defined as
the summation of knowledge, attributes, life experiences, enthusiasms, inventiveness and
energy that its people choose to invest in their duties (Mayo, 2012).
In our case above, we can assume that the ten employees are well motivated by a good
salary of 50, 000 USD per year. This salary is relatively higher when compared to the way the
economy is performing. We can also assume that of the total equity, the company invests 10%
(60000 USD) on improving human capital. If the above assumptions are held through, then the
human resource will be motivated to work harder. Therefore, increase the production level of
the company. This trend is possible because having a well-motivated employees and other
human capital will imply that, each and every individual will be motivated to work hard and
hence achieve the organization objectives (Machlup, 2014). Having a high performing
employees help employees to be motivated and work towards supporting and achieving the
company goals and strategies.
On the other hand, if the organizations human resource that is not well motivated, and
then the employees will engage in slow work-downs, industrial actions among other reliable
traits (Machlup, 2014). Therefore, lead to undesirable traits in the business organization.
Having a discouraged team of employees will reduce employee performance and may also
compromise the company’s corporate image. Therefore, a non-motivated human capital is a
liability and a contra-entry of human capital.
In conclusion, Human capital is finite and intangible (Mayo, 2012). However, human
capital can be natured and cultivated into valuable assets that create value in the organization.
Consequently, human capital can also decide to quit, become dishearten, sick and other
influence employees to turn against the company hence becoming a liability.
Machlup, F. (2014). Knowledge: Its Creation, Distribution and Economic Significance, Volume
III: The Economics of Information and Human Capital(Vol. 3). Princeton University
Mayo, M. A. (2012). Human Resources Or Human Capital?: Managing People as Assets.
Gower Publishing, Ltd..