Pp 10-new

Hall, Accounting Information Systems, 8e
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Accounting Information Systems, 8e
James A. Hall
Chapter 10
The REA Approach to
Business Process Modeling
1

Objectives for Chapter 10
 Recognize the economic foundations of the
resources, events, and agents (REA) model.
 Understand the key differences between
traditional entity relationship modeling and REA
modeling.
 Understand the structure of an REA diagram.
 Be able to create an REA diagram by applying
the view modeling steps to a business case.
 Be able to create an entity-wide REA diagram by
applying the view integration steps to a business
case.
2

Traditional Approaches:
User-View Orientation
 When data-modeling and IS design is
too oriented toward the user’s views,
problems arise:
 multiple information systems
 duplication of data
 restricted user-view leads to poor
decision-making
 inability to support change
3

Resources, Events, and Agents Model
 REA is an approach to database design
meant to overcome problems with traditional
approaches:
 formalized data modeling and design of IS
 use of centralized database
 use of relational database structure
 collects detailed financial and non-financial
data
 supports accounting and non-accounting
analysis
 supports multiple user views
 supports enterprise-wide planning
4

Resources, Events, and Agents Model
 REA models consist of three
entity types and the associations
linking them.
 Resources
 Events
 Agents
5

Resources in the REA Model
 Resources – the ‘assets’ of the company
 things of economic value
 objects of economic exchanges able to generate
revenue
 objects that are scarce and under the control of
the organization
 can be tangible or intangible
 Does not include some traditional accounting
assets:
 artifacts that can be generated from other primary
data
 for example, accounts receivables
6

Events in the REA Model
 Events are phenomena that effect
changes in resources.
 a source of detailed data in the REA
approach to databases
 Events fall into two groups:
 Economic – increases or decreases
resources
 Support – control, planning, and other
management activities; but do not directly
affect resources
7

Agents in the REA Model
 Agents can be individuals or departments.
 Participate in events
 Affect resources
 Have discretionary power to use or dispose of
resources
 Can be inside or outside the organization
 Clerks
 Production workers
 Customers
 Suppliers, vendors
 Departments, teams
8

Economic
Resource
Economic Event
External Economic
Agent
Internal Economic
Agent
Stock Flow
Duality
Participates
Participates
Basic REA Model
9
Figure 10-1

Resources, Events, and Agents
Model
 Another key feature of the REA
model is economic duality.
 Events occur in pairs
 Represent the give event and
receive event of an economic
exchange
10

Resource A
Give Economic
Event
External Agent
Internal Agent
Out Flow
Duality
Inflow Receive Economic
Event
External Agent
Internal Agent
Resource B
Participates
Give Activity
Receive Activity
Participates
Participates
Participates
REA Model showing Duality of
a Give and Receive Exchange
11
Figure 10-2

ER Diagrams (ERDs) versus
REA Diagrams (READs)
 Classes of entities
 ERDs – one class
 READs – three classes (resources, events, and agents)
 Arrangement of entities
 ERDs – determined by cardinality and readability
 READs – organized into constellations by class
 Sequencing of events
 ERDs – static
 READs – chronological sequence of business processes
 Naming conventions
 ERDs – all nouns
 READs – nouns (R’s and A’s) and verbs (E’s)
12

View Modeling: Creating an
Individual REA Diagram
 View modeling is a multistep process for
creating an individual REA model.
 The result is a single view of the entire database.
 The four steps involved are:
1. Identify the event entities to be modeled.
2. Identify the resource entities changed by events.
3. Identify the agent entities participating in events.
4. Determine associations and cardinalities between
entities.
13

Step 1: Identify the Event Entities
 Identify the events that are to be included
in the model.
 Include at least two economic events (duality)
 May include support events
 Arrange events in chronological sequence
 Focus on value chain events.
 Do not include invalid events such as:
 bookkeeping tasks
 accounting artifacts, e.g., accounts receivable
14

Take Order
Receive Cash
Verify Availability
Ship Product
Arrangement of Events Entities in Order of
Occurrence
Order of Events
Events
15
Figure 10-5

Step 2. Identify the Resource
Entities
 Identify the resources impacted by
events identified in step 1.
 Each event must be linked to at least
one resource.
 Economic events directly affect resources.
 Support events indirectly affect them.
16

Step 3. Identify the Agent Entities
 Each economic event entity in an REA
diagram is associated with at least two
agent entities.
 One internal agent
 One external agent
 It is possible to have only an internal
agent when no exchange occurs, as
with certain ‘internal’ manufacturing
processes.
17

18
REA Model Showing Events and Related
Resources and Agents
Figure 10-6

Step 4. Determine Associations and
Cardinalities between Entities
 Association –
 Reflects the nature of the relationship between two entities
 Represented by the labeled line connecting the entities
 Cardinality –
 The degree of association between the entities
 Describes the number of possible occurrences in one entity
that are associated with a single occurrence in a related
entity
 Cardinality reflects the business rules that are in play for
a particular organization.
 Sometimes the rules are obvious and are the same for all
organizations.
 Sometimes the rules differ, e.g., whether inventory items are
tracked individually or as quantity on hand.
19

Associations and Cardinality in REA
Diagram
20
Figure 10-8

Many-to-Many Associations
 Many-to-many (M:M) associations
cannot be directly implemented into
relational databases.
 They require the creation of a new
linking table.
 This process splits the M:M association
into two 1:M associations.
 The linking table requires a ‘composite
primary key’.
21

22
Link Tables in an REA Diagram
Figure 10-9

View Integration: Creating an
Enterprise-Wide REA Model
 View integration – combining several
individual REA diagrams into a single
enterprise-wide model
 The three steps involved in view integration
are:
1. Consolidate the individual models.
2. Define primary keys, foreign keys, and
attributes.
3. Construct physical database and produce user
views.
23

Step 1. Consolidate the Individual
Models
 Merging multiple REA models requires
first a thorough understanding of the
business processes and entities involved
in the models.
 Individual models are consolidated or
linked together based on shared entities.
 For example, procurement (expenditures) and sales
(revenue) both use inventory and cash resource
entities.
24

Integrated REA Diagram
25
Figure 10-12

Step 2. Define Primary Keys,
Foreign Keys, and Attributes
 Implementation into a working relational
database requires primary keys, foreign
keys and attributes in tables.
 Primary key –
• uniquely identifies an instance of an entity (i.e., each row
in the table)
 Foreign key –
• the primary key embedded in the related table so that the
two tables can be linked
 Attribute –
• a characteristic of the entity to be recorded in the table 26

Rules for Foreign Keys
 Primary key  Foreign key: Relations are formed
by an attribute that is common to both tables in the
relation.
 Assignment of foreign keys:
 if 1 to 1 (1:1) association, either of the table’s
primary key may be the foreign key
 if 1 to many (1:m) association, the primary key
on one of the sides is embedded as the foreign
key on the other side
 if many to many (m:m) association, create a
separate linking table with a composite primary
key
27

Attributes
28
Financial
Customer name
Customer address
Customer telephone
number
Amount owed by
customer
Value of total sales to
date
Terms of trade offered
Nonfinancial
Customer credit rating
Damaged goods
record
On-time payment
record
Customer volume
record
EDI access
Internet access
Using the customer as an example, these data include:

Step 3. Construct Physical
Database and Produce User Views
 The database designer is now ready to create the
physical relational tables using software.
 Once the tables have been constructed, some of them
must be populated with data.
 Resource and Agent tables
 Event tables must wait for business transactions to
occur before data can be entered.
 The resulting database should support the information
needs of all users.
 SQL is used to generate reports, computer screens, and
documents for users.
29

User-Views
30
User-View #1
Past Due Accounts
Name Amount
James $500.00
Henry $100.00
… …
Sales Report
User-View #2
REA Database

Value Chain Analysis
 Competitive advantages from the REA
approach can be see via value chain
analysis.
 Value chain analysis distinguishes between
primary activities (create value) and support
activities (assist performing primary activities).
 REA provides a model for identifying and
differentiating between these activities.
 Prioritizing Strategy: Focus on primary activities;
eliminate or outsource support activities.
31

Competitive Advantages of the
REA Model
 Using REA can lead to more efficient
operations.
 Helps managers identify non-value added
activities that can be eliminated
• Increasing productivity via elimination of non-
value added activities generates excess capacity
 Storing both financial and nonfinancial data in
the same central database reduces multiple
data collection, data storage, and maintenance.
32

Competitive Advantages of the
REA Model
 Using REA can lead to more efficient
operations.
 Detailed financial and nonfinancial business
data supports a wider range of management
decisions
• supporting multiple user views (e.g., different
perspectives on a problem)
 Provides managers with more relevant, timely,
and accurate information.
• leading to better customer service, higher-quality
products, and flexible production processes
33

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