AccountingInformationSystems, 6th edition

JamesA.Hall

COPYRIGHT 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license

ObjectivesforChapter10
y Economic foundations of the REA model
y Key differences between traditional ER modeling
and REA modeling
y The structure of an REA diagram
y Create an REA diagram by applying the view
modeling steps to a business case
y Create an entity-wide REA diagram by applying
the view integration steps to a business case

TraditionalApproaches:
UserViewOrientation
y When data-modeling and IS design is too

oriented toward the users views,

problems arise:
y multiple information systems
y duplication of data

y restricted user-view leads to poor decision-

making
y inability to support change

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

Resources,Events,andAgentsModel
y REA models consists of three

entity types and the associations

linking them.

y Resources
y Events
y Agents

ResourcesintheREAModel
y Resources the assets of the company
things of economic value
y objects of economic exchanges able to generate
revenue
y objects that are scarce and under the control of the
organization
y can be tangible or intangible
y

y Does not include some traditional accounting

assets:
artifacts that can be generated from other primary data
y for example, accounts receivables
y

EventsintheREAModel
y Events are phenomena that effect

changes in resources.

y a source of detailed data in the REA

approach to databases

y Events fall into two groups:

y Economic increases or decreases

resources
y Support control, planning, and other
management activities; but do not directly
affect resources

AgentsintheREA Model
y Agents can be individuals or departments.
y Participate in events
y Affect resources
y

Have discretionary power to use or dispose of

resources

y Can be inside or outside the organization

y
y
y
y
y

Clerks
Production workers
Customers
Suppliers, vendors
Departments, teams

Elemental REA Model

Participates

External Economic
Agent

Economic
Resource

Stock Flow

Economic Event

Duality

Participates

Internal Economic
Agent

Resources,Events,andAgentsModel
y Another key feature of the REA

model is economic duality.

y Events occur in pairs

y Represent the give event and receive

event of an economic exchange

REA Model showing Duality of

a Give and Receive Exchange
External Agent

Participates
Resource A

Out Flow

Give Economic
Event

Participates

Internal Agent

Give Activity

Duality
Receive Activity

Participates
Resource B

Inflow

Internal Agent

Receive Economic
Event

Participates

External Agent

ERDiagrams(ERDs)versusREADiagrams(READs)
y Classes of entities
y ERDs one class
y READs three classes (resources, events, and agents)

y Arrangement of entities
y ERDs determined by cardinality and readability
y READs organized into constellations by class

y Sequencing of events
y ERDs static
y READs chronological sequence of business processes

y Naming conventions
y ERDs all nouns
y READs nouns (Rs and As) and verbs (Es)

ViewModeling:Creatingan
IndividualREADiagram
y View modeling is a multistep process for creating
an individual REA model.
y

The result is a single view of the entire database.

y 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

Step1:IdentifytheEventEntities
y Identify the events that are to be included

in the model

y Include at least two economic events (duality)

y May include support events
y Arrange events in chronological sequence

y Focus on value chain events

y Do not such invalid events such as:
y bookkeeping tasks
y accounting artifacts, e.g., accounts receivable

Arrangement of
Events Entities in
Order of
Occurrence

Events
Order of Events
Verify Availability

Take Order

Ship Product

Receive Cash

Step2.IdentifytheResourceEntities
y Identify the resources impacted by events

identified in step 1
y Each event must be linked to at least one
resource.
y Economic events directly affect resources
y Support events indirectly affect them

Step3.IdentifytheAgentEntities
y Each economic event entity in an REA

diagram is associated with at least two

agent entities.
y One internal agent
y One external agent

y 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

REA Model showing Events and Related

Resources and Agents

Cash Receipts
Clerk

Step4.DetermineAssociationsand
CardinalitiesbetweenEntities
y Association reflects the nature of the relationship between
two entities
y Represented by the labeled line connecting the entities
y Cardinality the degree of association between the entities
y Describes the number of possible occurrences in one entity that
are associated with a single occurrence in a related entity
y Cardinality reflects the business rules that are in play for a
particular organization.
y Sometimes the rules are obvious and are the same for all
organizations.
y Sometimes the rules differ, e.g., whether inventory items are
tracked individually or as quantity on hand.

Associations and
Cardinality in REA
Diagram

Respond to Customer

Review Items Available

Customer Services
Clerk

Verify Availability

Request
Related
to

Customer
Places Order

Process Order
Reserves

Inventory

Sales
Representative

Take Order

Causes

Ships

Shipping Clerk

Reduces

Ship Product
Receives

Duality

Increases

Cash

Customer
Remits

Receive Cash
Processes
Remittance

Cash Receipts
Clerk

ManytoManyAssociations
y Many-to-many (M:M) associations cannot

be directly implemented into relational

databases.
y They require the creation of a new linking
table.
y This process splits the M:M association into

two 1:M associations.

y The linking table requires a composite
primary key.

Link Tables in REA Diagram

Inventory-Verify
Link

Verify Availability

Customer
Places Order

Process Order

Inventory

InventoryOrder Link

Causes

Inventory-Ship
Link

Sales
Representative

Take Order

Ships

Shipping Clerk

Ship Product
Receives

Customer

ViewIntegration:Creatingan
EnterpriseWideREAModel
y View integration combining several individual
REA diagrams into a single enterprise-wide
model
y 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

Step1.ConsolidatetheIndividual
Models
y Merging multiple REA models requires first

a thorough understanding of the business

processes and entities involved in the
models.
y Individual models are consolidated or
linked together based on shared entities.
y

For example, procurement (expenditures) and sales

(revenue) both use inventory and cash resource
entities.

Cust Ser Clerk

Purchasing Clerk
(Employee)

(Employee)
Order Product

Verify
Availability
Supplier
Request

Customer
Receiving Clerk
(Employee)

Receive Product

Sales Rep

Supplier

Inventory

Take Order

(Employee)

Shipping Clerk
Cash Disb Clerk
(Employee)

(Employee)

Disburse Cash

Ship Product
Payroll Clerk
(Employee)

Customer

Worker
(Employee)

Supervisor
(Employee)

Cash

Get Time

Receive Cash

Integrated REA Diagram

Cash Rec Clerk

(Employee)

Step2.DefinePrimaryKeys,Foreign
Keys,andAttributes
y Implementation into a working relational
database requires primary keys, foreign keys
and attributes in tables.
y

Primary key uniquely identifies an instance of an

entity (i.e., each row in the table)

y Foreign key the primary key embedded in the
related table so that the two tables can be linked
y Attribute a characteristic of the entity to be recorded
in the table

RulesforForeignKeys
y Primary key Foreign key: Relations are formed
by an attribute that is common to both tables in the
relation.
y Assignment of foreign keys:
y if 1 to 1 (1:1) association, either of the tables
primary key may be the foreign key
y 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
y 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
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

Step3.ConstructPhysicalDatabase
andProduceUserViews
y The database designer is now ready to create the
physical relational tables using software.
y Once the tables have been constructed, some of them
must be populated with data.
y Resource and Agent tables

y Event tables must wait for business transactions to occur

before data can be entered.
y The resulting database should support the information
needs of all users.
y SQL is used to generate reports, computer screens, and

documents for users.

UserViews
User-View #1
Past Due Accounts
Name Amount
James $500.00
Henry $100.00

User-View #2
Sales Report

REA Database

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

Firm Infrastructure
Human resource management
Technology development
Procurement
Inbound
Operations
Logistics

Output
Logistics

Primary Activities

Marketing
& Sales

Margin

Support Activities

Revenue
Costs

Service

CompetitiveAdvantagesoftheREA
Model
y Using REA can lead to more efficient operations.
y Helps managers identify non-value added activities
that can be eliminated
y

Increasing productivity via elimination of non-value

added activities generates excess capacity

y Storing both financial and nonfinancial data in the

same central database reduces multiple data

collection, data storage, and maintenance.

CompetitiveAdvantagesoftheREA
Model
y Using REA can lead to more efficient operations.
y Detailed financial and nonfinancial business data
supports a wider range of management decisions
y

supporting multiple user views (e.g., different

perspectives on a problem)

y Provides managers with more relevant, timely, and

accurate information.
y

leading to better customer service, higher-quality

products, and flexible production processes