Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 10
 Economic foundations of the REA model
 Key differences between traditional ER modeling
and REA modeling
 The structure of an REA diagram
 Create an REA diagram by applying the view
modeling steps to a business case
 Create an entity-wide REA diagram by applying the
view integration steps to a business case
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
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
Resources, Events, and Agents Model
 REA models consists of three
entity types and the associations
linking them.
 Resources
 Events
 Agents
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
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
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
 Elemental REA Model

Participates
External Economic
Agent

Stock Flow
Economic Economic Event
Resource

Duality Internal Economic

Participates Agent
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
REA Model showing Duality of
a Give and Receive Exchange
External Agent
Participates

Out Flow Give Economic

Resource A Event

Participates Internal Agent

Give Activity
Duality

Receive Activity
Internal Agent
Participates

Inflow Receive Economic

Resource B Event

Participates External Agent

ER Diagrams (ERD’s) versus REA Diagrams (READ’s)
 Classes of entities
 ERD’s – one class
 READ’s – three classes (resources, events, and agents)
 Arrangement of entities
 ERD’s – determined by cardinality and readability
 READ’s – organized into constellations by class
 Sequencing of events
 ERD’s – static
 READ’s – chronological sequence of business processes
 Naming conventions
 ERD’s – all nouns
 READ’s – nouns (R’s and A’s) and verbs (E’s)
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
 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 such invalid events such as:
 bookkeeping tasks
 accounting artifacts, e.g., accounts receivable
Arrangement of
Events
Events Entities in
Order of Order of Events
Occurrence Verify Availability

Take Order

Ship Product

Receive Cash
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
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.
 Resources Events Agents
Customer Services
Clerk

Inventory Verify Availability

Customer

Customer

Inventory Take Order

Sales
Representative

Shipping Clerk

Inventory Ship Product

Customer

Customer

Cash Receive Cash

Cash Receipts
Clerk
REA Model showing Events and Related
Resources and Agents
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.
Associations and Respond to Customer Customer Services
Clerk
Cardinality in REA
Diagram
Verify Availability
Review Items Available

Request

Related Customer
to
Places Order

Process Order
Reserves Sales
Inventory Take Order Representative

Causes Ships
Shipping Clerk

Reduces
Ship Product
Receives

Customer
Duality
Remits

Increases
Cash Receive Cash Cash Receipts
Clerk
Processes
Remittance
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’.
 Link Tables in REA Diagram

Inventory-Verify
Verify Availability
Link

Customer
Places Order

Process Order
Sales
Inventory Inventory- Take Order Representative
Order Link

Causes Ships
Shipping Clerk

Inventory-Ship Ship Product

Link Receives

Customer
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
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.
Purchasing Clerk Cust Ser Clerk
(Employee) (Employee)
Order Product

Verify
Availability
Supplier

Request

Customer
Receiving Clerk Receive Product
(Employee)

Sales Rep
Supplier
Inventory Take Order (Employee)

Shipping Clerk
Cash Disb Clerk (Employee)
(Employee) Disburse Cash

Ship Product

Payroll Clerk
(Employee) Customer

Worker Cash Rec Clerk

Cash Receive Cash
(Employee) (Employee)

Supervisor
(Employee) Get Time Integrated REA Diagram
 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
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
 Attributes
Using the customer as an example, these data include:
Financial Nonfinancial
Customer name Customer credit rating
Customer address Damaged goods
Customer telephone record
number On-time payment
Amount owed by record
customer Customer volume
Value of total sales to record
date EDI access
Terms of trade offered Internet access
 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.
 User-Views

User-View #1 User-View #2

Sales Report
Past Due Accounts
Name Amount
James $500.00 REA Database
Henry $100.00
… …
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.
 Porter’s Value Chain
Revenue
Costs

Firm Infrastructure
Human resource management
Technology development
Procurement

Inbound Output Marketing

Operations Service
Logistics Logistics & Sales

Primary Activities
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.
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