Accounting Information System Economic Event Agent Resource duality REA Method Accounting Information System Cleta D’Souza MBA 731-Fall 2007

AIS- Accounting Information System “An accounting information system is one that captures, stores, manipulates, and presents data about an organization’s value-adding activities to aid decision makers in planning, monitoring, and controlling the organization”

REA Resources, Events, Agents (REA) is a model of how an accounting system can be reengineered for the computer age. REA stands for, R- Resource E- Event A- Agent REA accounting model is developed using data modeling techniques Its structure consists of sets representing economic resources, economic events and economic agents and the relationships that exists between them REA was originally proposed in 1982 by William E. McCarthy as a generalized accounting model, and contained the concepts of resources, events and agents.

Categorization of Accounting Frameworks TABLE 1 Categorization of Accounting Frameworks Year Title Author Ideas Events Accounting 1969 An ‘events’ approach to basic accounting theory Sorter Events accounting Disadvantages of Value theory Operational rules 1970 Towards an "events" theory of accounting Johnson Forecast and observational verification criteria Definition of permissible  aggregation Mathematical model 1962 An inductive approach to accounting theory Schrader Difference between observed data and manipulated data Database Accounting 1971 A unified approach to the theory of accounting and information systems Colantoni, Manes and Whinston Introduction of database concepts Event coding Key algebra 1975 A structuring of an events-accounting information system Lieberman and Whinston Three part structure User-defined database characteristics Self-organizing database capabilities 1976 Design of a multi-dimensional accounting system Haseman and Whinston Hierarchical organization of events database Definition of restructuring functions 1977 A relational approach to accounting models Everest and Weber Data independence Normalization

Semantically-Modeled Accounting 1939 What's wrong with accounting? Goetz Maintain an unadulterated Basic Historical Record 1949 Management planning and control Basic Pecuniary Record plus a legal- financial supplement 1948 Pretiale Wirtschaftslenkung, Volume 2 [Pretiale Lenkung] Schmalenbach Develop a basic accounting system with no particular objective (a Grundrechnung) 1979 An entity-relationship view of accounting models McCarthy Second generation data modeling Artifact-free design REA Accounting 1982 The REA accounting model:  A generalized framework for accounting systems in a shared data environment McCarthy REA accounting model Generalization hierarchies Semantic expressiveness Enterprise-wide conceptual schema

Features of REA An extension of the conventional accounting models to include management information needs of managerial decision models and non financial measures of effectiveness. Rea Model provides shared data access to accountant and non accountants A generalized E-R representation of an accounting phenomena. REA helps represent traditional accounting debit-credit phenomena.

REA explores the issues of database design and E-R accounting methodology, to include the concept of generalization. REA replaces bookkeeping schemes with an accounting framework whose structure is derived with semantic modeling and whose elements correspond to the accounting principles.

Steps Database design process where needs of both accountants and non accountants are serviced through shared access to centrally stored data. - Conceptual schema, defines entities, their properties and relationships. E-R representation of the accounting phenomena. (REA Accounting Model)

Database Design Process - Requirements analysis - View modeling - View integration

REA Data Model- Elements Economic Resources Includes objects that are scarce and have utility under control of an enterprise (includes Assets except Accounts receivables) Economic Events a class of phenomena which reflects changes in scarce means resulting from production, exchange, consumption and distribution Economic Agent Includes persons and agencies who participate in the economic events or who are responsible for the subordinates participation. - Economic Units A subset of economic agent, are inside the economic agents- work for the economic agent or are part of the enterprise. Control Relationship/Participant A three way relation between an event, an insider agent (unit) and a outsider (agent).

Generalizing of Data When all the generalized elements are combined the E-R framework as shown below results.

REA Template Give Take Economic Resource Inside Agent Economic Event Outflow Participant Outside Agent Give Duality Take Outside Agent Economic Event Inflow Participant Inside Agent Economic Resource

Revenue Process using REA Model Inventory Sales Person Sale Outflow Participant Give Customer Duality Take Cash Receipt Inflow Participant Cashier Cash

The relationship between customer and sales is a 1:N relationship The relationship between customer and sales is a 1:N relationship. We make the primary key for the entity that occurs only once (customer) serve as a foreign key in the entity that can occur many times (sale). Customer Inventory Sale Employee Cash Receive Cash Customer

EXAMPLE Table Name Primary Key Foreign Key Other Attributes Sale Sale No. Customer No., Employee No. Date of Sale, Time of Sale, Total Amount of Sale Receive Cash Cash Rect. No. Employee No., Customer No., Sale No., Account No. Receipt Date, Receipt Time, Total Amount of Receipt Inventory Item No. Description, List Price Cash Bank, Type of Account Customer Customer No. Customer Name, Customer Address, Customer Phone Employee Employee No. Employee Name, Employee Address, Employee Phone, Job Title Sales-Inventory Sale No.-Item No. Quantity Sold, Actual Price

Where can REA be applicable? Labeled as an accounting system. Can be used for various other business functions. Supply chain collaboration inventory control (assigning goods to resources, transfers to events, and owners to agents.) for payroll by assigning lengths of time to resources (assigning time cards to events, and employees to agents.)

Different perspectives on REA modeling needed for enterprise modeling (value chains) and collaboration space (supply chains) Enterprise modeling (as evidenced in normal ERP systems) is done from the perspective of one company or entrepreneur. Business processes are viewed as components of a single value chain. A single exchange (like the sale of a product for money) would be modeled twice, once in the enterprise system of each trading partner. Collaboration space modeling (as evidenced in ebXML or ISO Open-edi) is done from a perspective independent of each trading partner. A single exchange is modeled once in independent terms that can be then mapped into internal enterprise system components. Supply chains are networks of business processes that alternate internal transformations and external exchanges (definition due to Bob Haugen). REA modeling works in both cases and the independent to trading partner mapping is absolutely straightforward and completely defined.

References Dunn, Cheryl L, and William McCurthy. "The REA Accounting Model: Intellectual Heritage and Prospects for Progress." Michigan State Uniiversity. http://www.msu.edu/user/mccarth4/DUNN&MC.htm (accessed November 4, 2007). http://www.msu.edu/user/mccarth4. McCarthy, William. "An Entity-Relationship View of Accounting Models." The Accounting Review, 1979. McCarthy, William. "The REA Accounting Model: A Generalized Framework for Accounting Systems in a Share Data Environment." The Accounting Review, 1982. Romney, and Steinbart. "Implementing an REA Model in a Relational Database." In Accounting Information Systems, by Romney and Steinbart. Prentice Hall Publishing, 2006. Wikipedia. http://en.wikipedia.org/wiki/Resources,_Events,_Agents (accessed November 3, 2007).