Behavioral Accounting

What Is Behavioral Accounting?

Behavioral accounting takes into account key decision-makers' experience and incentives as part of the evaluation of a company. It also examines how accounting practices and processes, in turn, affect the behavior and processes of personnel working in a company.

Behavioral accounting may also be known as "human resource accounting."

How Behavioral Accounting Works

The definition of behavioral accounting is “an offspring from the union of accounting and behavioral science; it represents the application of the method and outlook of behavioral science to accounting problems." The objective of behavioral accounting is “to understand, explain, and predict human behavior in accounting situations or contexts.”

The behavioral aspect of accounting is that segment of accounting that attends to develop an understanding of both cognitive (perceived) and affective (emotional) elements of human behavior that influence the decision‐making process in all accounting contexts and settings. This special area of accounting addresses such aspects as human information‐processing behavior, judgment quality, accounting problems that are created by users and providers of accounting information, and accounting information users’ and producers’ decision‐making skills.

Behavioral accounting was developed to make the behavioral effects of accounting practices transparent to potential and current stakeholders. This is done to better understand the impact that business processes, opinions, and human variables have on the value of the overall corporation, now and in the future.

In behavioral accounting, the valuation of a company goes beyond the numbers and attempts to include the human factor. Behavioral accounting attempts to measure and record this aspect of a business. Behavioral accounting is of particular interest to scholars due to the influence of time constraints, accountability, judgments, and motivations individual decision-makers have.

Examples of Behavioral Accounting

Take the example of two companies, company ABC Corporation and DEF Inc., which have identical financial statements and equal assets. If ABC has a more experienced workforce and stronger management than DEF, then ABC should be worth more in terms of market valuation and profitability.

Within a company, behavioral accounting can also be used to better evaluate employee performance. If top management uses both financial and nonfinancial measures in their performance evaluations when they assess the performance of middle‐level managers, the middle‐level managers are more likely to also use both financial and nonfinancial measures in their subordinates’ evaluation.

On the other hand, if the top management uses just financial measures and ignores nonfinancial measures in the evaluation of their middle‐level managers’ performance, their prejudice will spread to the next level of management via the contagion effect, who may put excessive emphasis on financial measures in performance evaluations as well.