1. The REA Approach to Business Process Modeling
Accounting Information Systems, 5th edition
James A. Hall
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license

2. 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

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

4. Resources, Events, and Agents Model
Developed in the ‘70's by Dr. McCarthy (Michigan State)
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 is a major change from the traditional double-entry approach.
The REA or events perspective is increasingly seen as necessary to meet changing information needs.

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 non-financial data
supports accounting and non-accounting 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
their interrelationships
A variation of entity-relationship diagramming (ERD) 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
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
A variation of the entity-relationship diagramming (ERD) is used in REA modeling.
Basic ERD symbols:
entity
relationship
(optional)
attribute
(optional) 42

11. Advantages of the REA Model
Using REA can lead to more efficient operations
helps managers identify non-value added activities that can be eliminated
increased 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
detailed financial and nonfinancial business data supports a wider range of management decisions
increased competitive advantage by providing more relevant, timely, and accurate information to managers 43

12. 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

13. Database Sales Order Entry/Cash Receipts System

14. Database Purchases/Cash Disbursement System

15. 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 non-economic/non-financial information
REA is event-oriented versus event-based.
includes non-economic and economic event information

16. 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.

17. REA Example: Horizon Books
Horizon Books is a bookstore in downtown Philadelphia. It carries an inventory of approximately 5,000 books. Customers come in and browse the shelves, select their books, and take them to one of three cashiers positioned in different parts of the store. One of the cashiers is situated at an information desk where customers can discover whether a particular book is in stock, place orders for books not currently available in the bookstore, and collect and pay for books previously ordered. The cashier at the information desk has a book database that is consulted for every query. There are no credit sales. All customers pay for their purchases at the time of purchase.

18. 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.

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

20. Developing an REA Model: Step 2
Organize the operating events identified in sequence of occurrence
Show each event is shown as verb-object
This facilitates arranging them in order of occurrence.
Note that the verb/event is represented from the perspective of the organization, not the customer.

21. REA Example: Horizon Books
Step 2: Place operating events in sequence

22. 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?

23. REA Example: Horizon Books
Step 3: Identify resources and agents associated with events

24. 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

25. REA Example: Horizon Books
Step 4: Establish Horizon Books’ sales process relationships.

26. Developing an REA Model: Step 5
Assign the record associations or cardinalities of all the entity relationships
Five forms of associations (minimum-maximum cardinalities) are used when constructing the REA model:
zero-to-one (0,1)
zero-to-many (0,M)
one-to-one (1,1)
one-to-many (1,M)
many-to-many (M,M)—rare

27. REA Example: Horizon Books
Step 5: Completed REA model of sales process with cardinalities.

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

29. Developing an REA Model: 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

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

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

32. ERD of Manufacturing

33. REA Model of Manufacturing, 1

34. REA Model of Manufacturing, 2