1. The REA Approach to Business Process Modeling
Chapter 10
The REA Approach to Business Process Modeling 1

2. Objectives for Chapter 10
Limitations of traditional database system
Benefits of adopting an REA approach to information systems compared to a traditional approach
Implications of REA for the accounting profession
Steps involved in preparing an REA model of a business process
Importance of identifying the attributes of entity relations in relational database design
Differences between an REA model representation of a business process and an ER diagram representation 31

3. 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

4. Traditional Approaches: Financial Accounting Orientation
Dominance of accounting as the primary information provider leads to problems:
single view of business entity using the accounting model:
double-entry, debits and credits
high level of aggregation
ignoring nonfinancial data
inability to serve diverse enterprise-wide needs
Assets = Liabilities + Owners’ Equity

5. Resources, Events, and Agents Model
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 nonfinancial data
supports accounting and nonaccounting analysis
supports multiple user views
supports enterprise-wide planning

6. Resources, Events, and Agents Model
The REA model is an alternative accounting framework for modeling an organization’s
economic resources
economic events
economic agents, and
interrelationships
A variation of the Entity-Relationship diagramming is used to model these relationships. 42

7. Resources in the REA Model
Economic resources are the assets of the company.
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:
For example, Accounts Receivables
These are artifacts that can be generated from other primary data 42

8. Events in the REA Model
Economic events are phenomena that effect changes in resources.
A source of detailed data in the REA approach to databases
Three classes of events:
Operating events--what happens
Information events--what is recorded
Decision/management events--what is done as a result
Only operating events are included in the REA model. 42

9. Agents in the REA Model Can be individuals or departments
Can participate in events
Can 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 42

10. Resources, Events, and Agents Model
Developed in the ‘70s by Dr. McCarthy (Michigan State University) from ER diagramming for accounting.
The definition of events is broad enough to encompass both operational and accounting transactions.
Expands the scope and usefulness of AIS by making it capable of providing both financial and nonfinancial information.
Data for each event is stored in disaggregated form.
Outputs are subsequently produced by assembling the required data from the various records.
Many firms have not adopted the REA model since it represents a major change from the traditional double-entry approach.
The REA-events perspective will be increasingly seen as necessary to meet changing information needs in this information age.

11. Resources, Events, and Agents Model
A variation of the Entity-Relationship diagramming is used in REA modeling.
ER-Diagram Symbols 42

12. Advantages of the REA Model
More efficient operations
It helps managers identify non-value added activities that can be eliminated.
Storage of both financial and nonfinancial data in the same central database reduces the need for multiple data collection, data storage, and maintenance procedures.
Storing financial and nonfinancial data about business events in detailed form permits the support of a wider range of management decisions.
Increased productivity via elimination of non-value added activities that will generate excess capacity
Competitive advantage by providing more relevant, timely, and accurate information 43

13. Value Chain Analysis
The competitive advantage benefits of adopting the REA approach are most clearly seen from the perspective of the value chain.
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. 43

14. Human resource management Technology development
Porter’s Value Chain
Revenue
Costs
Firm Infrastructure
Human resource management
Support Activities
Technology development
Procurement
Margin
Inbound Logistics
Operations
Output
Logistics
Marketing
& Sales
Service
Primary Activities

15. Database Applications
Phase 1
Flat Files
Phase 2
Event-Driven
Database
Phase 3
REA-Model
Database
Limitations:
Not widely used;
Requires detailed analysis
Limitations:
Redundant data;
Anomalies
Limitations:
Loss of non-economic information

16. Limitations of Transaction-Based Systems
Event: a single business activity within a business process which involves resources and agents
Traditional event-based database systems tend to focus exclusively on economic events.
Loss of noneconomic/nonfinancial information
REA is event-oriented v. event-based.
i.e., includes noneconomic and economic event information

17. Developing an REA Model: Overview
Before developing the REA model, identify events and classify as:
Operating events--activities that produce goods and services
Information events--activities associated with recording, maintaining, and reporting information
Decision/Management events--activities that lead to decisions being taken
REA model uses only operating events.

18. REA Example: Horizon Books

19. Developing an REA Model: Step 1
Identify the operating events that are to be included in the model.
These are the events that support the strategic objectives of the organization and about which we need to gather information.

20. REA Example: Horizon Books
Answer
Query
Make
Sale
Receive
Payment
Step 1: Identify operating events in Horizon Books’ sales model.

21. Developing an REA Model: Step 2
The operating events identified now need to be organized in sequence of occurrence.
Notice how each event is shown as verb-object.
This facilitates arranging them in order of occurrence.
Note also that the verb is represented from the perspective of the organization, not the customer.

22. REA Example: Horizon Books
Answer
Query
Make
Sale
Receive
Payment
Step 2: Place Horizon Books’ operating events in sequence.

23. Developing an REA Model: Step 3
Identify the resources and agents involved in each operating event.
This is most easily done by answering who, what, and where questions about each event.
Who was involved?
What was involved?
Where did it take place?

24. REA Example: Horizon Books
Inventory
Database
Customer
Answer
Query
Make
Sale
Receive
Payment
Information
Desk
Books
Cashier
Cash
Resources
Events
Agents
Step 3: Identify resources and agents associated with events.

25. Developing an REA Model: Step 4
Identify the links between the resources, events, and agents.
Start from each event and connect it to the resources and agents that are involved in the event.
Draw a line connecting events that are logically related.

26. REA Example: Horizon Books
Inventory
Database
Customer
Answer
Query
Make
Sale
Receive
Payment
Information
Desk
Books
Cashier
Cash
Step 4: Establish Horizon Books’ sales process relationships.

27. Developing an REA Model: Step 5
Assign the record associations or cardinalities of all the entity relationships.
The three fundamental cardinalities are:
one-to-one (1:1)
one-to-many (1:M)
many-to-many (M:M)

28. REA Example: Horizon Books
Inventory
Database
Customer
Answer
Query
Make
Sale
Receive
Payment
Information Desk
Books
Cashier
Desk
Cash
(1,1)
(0,M)
(1,M)
(0,1)
Step 5: Completed REA model of Horizon Books’ sales process with cardinalities.

29. REA Model v. ER-Diagram
The two methods have a lot in common, but there are differences:
ER-diagramming is more commonly found with traditional event-based systems.
REA-modeling is used with event-oriented systems.
ER-diagrams use diamonds to show events, while REA model classifies events as a type of entity.
REA includes only operating events, while ER-diagrams can capture all three types of event.
REA information facilitates placement of internal controls.
REA is simpler and more focused on business needs.

30. Developing an REA Model: Attributes and User-Views
The final step is to define the attributes associated with the entities in the REA model.
These are used to populate the database.
They are also used to create the various physical user-views needed in daily operations:
Reports, documents, computer interfaces

31. Developing an REA Model: Attributes

32. Developing an REA Model: User-Views
REA Database
Sales Report
Past Due Accounts
Name Amount
James $500.00
Henry $100.00
… …