The Integration of an Accounting Domain Ontology (REA) within an Upper Ontology (SUMO) Bill McCarthy, Michigan State University mccarthy@bus.msu.edu http://wwww.msu.edu/user/mccarth4/

SOURCES: REA – The Ontological Foundations of REA Enterprise Information Systems, Guido Geerts and William McCarthy, March 2005 SUMO – Towards a Standard Upper Ontology, Ian Niles and Adam Pease, Towards a Standard Upper Ontology. In Proceedings of the 2nd International Conference on Formal Ontology in Information Systems (FOIS-2001), Chris Welty and Barry Smith, eds, Ogunquit, Maine, October 17-19, 2001.

Motivation ? Why accounting ? Why REA ? Research – peer review Teaching Why Ontology ? Interoperability & standard semantics UN, ISO, ECIMF Why SUMO ? Serve as model above with connections to real world phenomena Serve as model below with connections to real world phenomena Availability & peer review Tractability Coming market presence

Cookie-Monster (the customer) and Elmo (the entrepreneur) meet in the (real or virtual) marketplace, thus setting the stage for an Economic Exchange

outside participation outside participation Economic Resource inside participation Economic Agent stock-flow Economic Event Economic Agent outside participation Give duality Take outside participation Economic Agent stock-flow Economic Event Economic Agent inside participation Economic Resource REA model of cookie sale from entrepreneur’s (ELMO) perspective

outside participation Give Take Economic Resource inside participation outside participation stock-flow Economic Event Economic Agent duality COOKIES SALE ELMO cookie monster CASH RECEIPT REA model of cookie sale from entrepreneur’s (ELMO) perspective

outside participation Give Take Economic Resource inside participation outside participation stock-flow Economic Event Cash Receipt Economic Agent Salesperson Customer Cashier Cash Cookies duality Sale more general exchange model from the entrepreneur’s (ELMO’s) internal perspective

Partial Database for Elmo’s Cookie Business COOKIES COOKIES-stockflow-SALE Product# Description Price QOH P-1 Chocolate Chip 1.05 200 P-2 Chocolate .95 205 P-3 Peanut Butter 1.00 97 P-4 Pecan 1.10 257 Product# Invoice# Quantity P-2 I-1 5 P-3 10 I-2 20 P-4 I-3 9 P-1 I-4 4 SALE-duality-CASH_RECEIPT SALE Invoice# Dollar Amount Date Salesperson Employee# Customer # I-1 14.75 1JUL E-1234 C-987 I-2 20.00 2JUL E-1235 C-888 I-3 9.90 3JUL E-1236 C-999 I-4 9.20 5JUL E-1237 Invoice# Receipt Timestamp Amount Applied I-1 2JUL0830 14.75 I-2 3JUL0800 2.00 5JUL0800 18.00 I-3 8JUL1145 9.90 I-4 9.20 Partial Database for Elmo’s Cookie Business Why is this invoice amount $14.75 ?? How is customer paying for this ???

( the past & near present ) Resource Event Agent What actually occurred Rtype Etype Atype ( the future ) What could be or should be Commit ( the foreseeable present ) Event Rtype Etype Atype What is planned or scheduled REA model – the elevator pitch

Figure 1 -- Normative Primitives of the REA Ontology What has occurred Economic Event Economic Agent stock-flow duality Economic Resource participation Figure 1 -- Normative Primitives of the REA Ontology

{responsibility, assignment, cooperation} custody duality Economic Resource Economic Event Economic Agent materializes settles linkage {composition} association {responsibility, assignment, cooperation} Economic Claim Figure 2 -- Association, Linkage, Custody, and Claim Relationships

Figure 3 -- REA 3-level architecture Exchange Customer Car Maintained Car Labor Cash Revenue Rental Contract Agent Receipt Cashier Figure 3 -- REA 3-level architecture

Payroll Process Acquisition Maintenance Revenue Cash Acquisition Labor Maintenance Car Revenue Maintained Car Exchange Customer Car Maintained Car Labor Cash Revenue Rental Contract Agent Receipt Cashier

Payroll Process Acquisition Maintenance Revenue Cash Acquisition Labor Maintenance Car Revenue Maintained Car Exchange Customer Car Maintained Car Labor Cash Revenue Rental Contract Agent Receipt Cashier Accept Customer Contact Assess Customer Needs Check Car File & Choose Assess Insurance Options & Credit Fill in Contract Customer Pays Find Car & Provide Keys Return Car Update Files Check Out Car

Figure 4 – Three-Level Architecture Model Value Chain networked Business Process Business Event task-composition workflow Economic Event duality aggregate Figure 4 – Three-Level Architecture Model

Named Set of Objects with Labeled Clusters Harry Jane Named Set of Objects Tom Dick Ashley Economic Agents Salespeople Tom Dick Ashley Harry Jane Named Set of Objects with Labeled Clusters Group & Name Clusters Cashiers Figure 6 -- Typifying to Planning & Control Level

Planning & Control level Named Set of Objects with Labeled Clusters Named Set of Groups Cashiers Salespeople Economic Agent Type Operational Level Planning & Control level Typifiy Grouping Harry Jane Named Set of Objects Tom Dick Ashley Economic Agents Salespeople Tom Dick Ashley Harry Jane Named Set of Objects with Labeled Clusters Group & Name Clusters Cashiers Figure 6 -- Typifying to Planning & Control Level

What could be or should be Economic Resource EconomicEvent Economic Agent ResourceType Event Type Agent Type REA Typing Extensions

Economic Resource Type Economic Event Type Economic Agent Type policy/ standard policy/ standard typify typify typify Economic Resource EconomicEvent participation Economic Agent stock-flow Figure 7 – Type Connections for Control and Planning

Figure 8 -- Subtypes (possible) for ECONOMIC RESOURCE Economic Resource Type typify structure composition Economic Resource Goods Services Rights Intellectual Product (IPR) Real Estate Regulatory Service Transport-ation Services Materials Human Services Funds Right of Way Warranty Insurance Figure 8 -- Subtypes (possible) for ECONOMIC RESOURCE

Figure 9 -- Subtypes of Economic Agent for an Exchange Economic Agent Type Economic Agent typify Regulator Mediator Guarantor Notary Escrow Third Party Partner Buyer Seller Figure 9 -- Subtypes of Economic Agent for an Exchange

Fig. 5 – Agreement as a Bundle of Commitments What is planned or scheduled Economic Agreement commitment fulfills commitment reciprocal fulfills economic event duality Fig. 5 – Agreement as a Bundle of Commitments

Fig. 10 – Abstract Specification of Commitments What is planned or scheduled specifies Resource Type specifies Event Type Commitment specifies Agent Type Fig. 10 – Abstract Specification of Commitments

Figure 11 -- ISO Open-edi Phases of a Business Process Planning: In the Planning Phase, both the buyer and seller are engaged in activities to decide what action to take for acquiring or selling a good, service, and/or right. Identification: The Identification Phase pertains to all those actions or events whereby data is interchanged among potential buyers and sellers in order to establish a one-to-one linkage.  Negotiation: The Negotiation Phase pertains to all those actions and events involving the exchange of information following the Identification Phase where a potential buyer and seller have (1) identified the nature of good(s) and/or service(s) to be provided; and, (2) identified each other at a level of certainty. The process of negotiation is directed at achieving an explicit, mutually understood, and agreed upon goal of a business collaboration and associated terms and conditions. This may include such things as the detailed specification of the good, service, and/or right, quantity, pricing, after sales servicing, delivery requirements, financing, use of agents and/or third parties, etc. Actualization: The Actualization Phase pertains to all activities or events necessary for the execution of the results of the negotiation for an actual business transaction. Normally the seller produces or assembles the goods, starts providing the services, prepares and completes the delivery of good, service, and/or right, etc., to the buyer as agreed according to the terms and conditions agreed upon at the termination of the Negotiation Phase. Likewise, the buyer begins the transfer of acceptable equivalent value, usually in money, to the seller providing the good, service, and/or right. Post-Actualization: The Post-Actualization Phase includes all of the activities or events and associated exchanges of information that occur between the buyer and the seller after the agreed upon good, service, and/or right is deemed to have been delivered. These can be activities pertaining to warranty coverage, service after sales, post-sales financing such as monthly payments or other financial arrangements, consumer complaint handling and redress or some general post-actualization relationships between buyer and seller. SOURCE: ISO FDIS 15944-1 – Operational Aspects of Open-edi for implementation Figure 11 -- ISO Open-edi Phases of a Business Process

Ontological Components Business Process Phases Planning Business Events with Types of Resources & Agents Identification typify Business Events with Commitments for Types of Resources, Events, and Agents Negotiation fulfillment Actualization Business & Economic Events with Resources & Agents Post-Actualization BP Phases with Components

An Example Business Transaction with Business Events Grouped in Phases BT Phase Example Business Event Planning Seller publishes Catalog Buyer sends CatalogRequest to Seller Seller sends Catalog to Prospective Buyer Identification Buyer sends AvailabilityandPriceRequest to Seller Seller returns AvailabilityandPriceResult to Buyer Negotiation Seller sends OrderRequest to Buyer Buyer sends Offer to Seller Seller sends CounterOffer to Buyer Buyer sends an OrderAcceptance to Seller for parts (alternatively a NonAcceptance would suspend or abandon the Business Transaction) Actualization Seller sends an AdvanceShippingNotice when goods are prepared for shipping Buyer sends ReceivingReport to Seller when inspected goods are accepted Seller sends an Invoice to Buyer after parts are shipped Buyer sends RemittanceAdvice to Seller with information about payment of the Invoice Post-Actualization Buyer sends WarrantyInvocation to Seller An Example Business Transaction with Business Events Grouped in Phases

Economic Resource Type Bilateral Collaboration Mediated Collaboration Economic Contract governs Agreement typifies establish specifies specifies Economic Agent Type involves Economic Commitment reciprocal Economic Event Type specifies qualifies reserves fulfills Regulator typifies Economic Resource stockflow Economic Event from Economic Agent to Business Process duality constrains Third Party Partner requires Business Event Bilateral Collaboration participates Mediated Collaboration ISO Collaboration Ontology

Business Process Phases Economic Resource Type workflow Business Event Economic Resource Type Economic Agreement Business Process governs typify establish specifies specifies Economic Commitment Economic Agent Type specifies reciprocal Economic Event Type typify fulfills typify Economic Resource stock-flow Economic Event inside Economic Agent outside duality materializes settles Economic Claim Figure 12 -- The REA Ontology with BP Phases

Business Object Lifecycle Business Object State Business Event transitionedBy Figure 13 – Business Objects, Lifecycles, and States

Sample Business Object Example States (Lifecycles) for Business Object Business Process Waiting-Start In-Service Completed Aborted Suspended Economic Claim Materialized Settled Economic Resource Type Candidate Planned Identified Proposed Specified Substituted Business Process Phase Pending Complete Figure 14 – Sample States for Business Objects

Figure 15 – State Machine Diagram for Economic Resource Type Candidate Planned <<BusinessEvent>> publishCatalog <<BusinessEvent>> sendCatalogRequest <<BusinessEvent>> acceptAvailabilityAndPriceRequest Proposed Identified <<BusinessEvent>> sendOffer <<BusinessEvent>> acceptOffer Specified Substituted <<BusinessEvent>> shipAcceptableSubstitute Figure 15 – State Machine Diagram for Economic Resource Type

Different Views of Business Collaboration Collaboration Perspective: Trading Partner vs. Independent Enterprise #1 Independent view of Inter-enterprise events Business Process Enterprise #1 Business Process Enterprise #2 Business Process Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers) Dotted arrows represent flow of goods, services, and cash between different companies; solid arrows represent flows within companies Different Views of Business Collaboration

?? PORTFOLIO of ATTRIBUTES: ingredients baked advertised delivered guaranteed fresh ??

To do ? REA & this paper Economics – more formal (bundle, “2”, etc.) Independent view State machine mechanics (exhaustive ?) Economics – more formal (bundle, “2”, etc.) Standards & open source Accounting Theory -- claim, temporal & sectional (ABC), various expensing, internal control specification, materialization Outreach – XBRL & financial reporting Philosophy – more formal (KIF), upper integration (SUMO), resolution of Bunge & events Computer Science – OO, patterns, contract languages MIS Events & behavioral – leave to others

SUMO questions ??

<-- SetClass --><--- Proposition--->  classification typification  Reality Token Category Type Image Carol Dick Harry Alice Customer Customer Type <-- SetClass --><--- Proposition---> red = SUMO abstraction differences to be adjusted

red = SUMO differences to be adjusted SOWA analysis of REA (2002) Physical Categories Abstract Categories Continuant Occurrent 1st (Independent) Object EconomicAgent (A) EconomicResource (R) Process EconomicEvent (E) Commitment (C) Schema AgentType (AT) ResourceType (RT) Script EventType (ET) CommitmentType (CT) 2nd (Relative) Juncture Association (A-A) Custody (A-R) Linkage (R-R) Participation StockFlow (E-R) Duality (E-E) Accountability (E-A) Fulfills (C-E) Involvement (C-A) Reserved (C-R) Reciprocal (C-C) Description Typification (A-AT) (R-RT) Characterization (AT-AT) (AT-RT) (RT-RT) History (E-ET) Specification (C-RT) (C-ET) (C-AT) Scenario (ET-RT) (ET-ET) (ET-AT) 3rd (Mediating) Structure Responsibility Partnering Configuration Situation Exchange Conversion Contracting Scheduling Reason Segmentation Policy Substitutability Complementarity Purpose Standardization Strategy ? ? -------------------- proposition only ? XXXXXXX red = SUMO differences to be adjusted

REA & SUMO terms Economic Event stock-flow Economic Resource participation Economic Agent duality Exchange reciprocal Conversion fulfills Economic Claim typify Business Event policy Economic Commitment specifies Economic Agreement Event Type Agent Type Resource Type

SUMO questions General: REA is primarily schematic; SUMO is primarily taxonomic. How to integrate ? How far to decompose ? Must MILO and other domain ontologies (financial) be aligned ? 3D vs. 4D positions (endurantists vs. perdurantists) How to deal with process decomposition and duration? Value (Supply) Chain – Business Process – BP phases – Economic Events – Business Events -- Smaller Business Events Nature of abstract specification (typification) Specifics: Economic Resources like services and rights – Objects ? human & organizational agents ? CaseRole ? ChangeOfPossession ? More general predicates with attached reasoning