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Participates
External Economic
Agent
Stock Flow
Economic Economic Event
Resource
Give Activity
Duality
Receive Activity
Internal Agent
Participates
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
Customer
Customer
Shipping Clerk
Customer
Customer
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
Cardinality in REA Clerk
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
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)
Disburse Cash
(Employee)
Ship Product
Payroll Clerk
(Employee) Customer
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
Support Activities
Firm Infrastructure
Human resource management
Technology development
Margin
Procurement
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