1. The Foundation of the Business Process Model - Economic Exchanges
Economic Exchange – Two related economic events where we acquire one resource in exchange for another
Economic exchanges are important because they involve the most fundamental events where value is added in the business. Therefore, the first part of this course will focus on these events only.
Examples: give cash, get inventory; give inventory, get cash; get cash from investor, give dividend to investor; borrow money from bank, give money to bank; give cash, get building; give cash, get services

2. Components of an Economic Exchange
Two related events
Each event is associated with a resource – one event increases resources (get), the other decreases or uses resources (give); get and give may, and usually do, involve different resources
Each event usually involves one internal agent and one external agent; in an exchange, generally the same external agent is associated with both events
Goal is to understand what the events, resources and agents are, and the nature of the relationships between them

3. An REA Model of an Economic Exchange
William E. McCarthy*
Michigan State University
(These slides may be copied as long as original source is cited) *

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

5. Economic Exchange Pattern
Event
Agent
Resource
duality R E A
Source:
W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting Systems in a Shared Data Environment,” The Accounting Review, July 1982, pp
W.E. McCarthy “The REA Modeling Approach to Teaching Accounting Information Systems,” Issues in Accounting Education, November 2003, pp (source of following slides)

6. Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in a SHIPMENT (transfer of Cookie Inventory)

7. outside participation outside participation
Economic Resource
COOKIES
inside participation
Economic Agent
ELMO
stock-flow
Economic Event
SALE
Economic Agent
outside participation
cookie
monster
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

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

9. 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

10. 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 ???

11. Part of ELMO’s Value Chain for Providing Cookies
A business process is a set of activities that takes one or more kinds of input and creates an output that is of greater value to the customer (Hammer and Champy)
business process
labor
cookies
Conversion Cycle
business process
Revenue Cycle
cash
business process
cookie ingredients
Acquisition Cycle
cash
value chain
A value chain is a purposeful network of business processes aimed at assembling the individual components of a final product (i.e., its portfolio of attributes) of value to the customer (Porter and Geerts/McCarthy)
Part of ELMO’s Value Chain for Providing Cookies

12. Enterprise Information Basic Systems Counting Accounting
Semantic infrastructure of system matches extended REA pattern
Enterprise
Information
Systems
Basic
Accounting
Systems
Counting
artifacts
e-collaboration
systems
Enterprise Systems classification structure is from David, McCarthy & Sommer, Communications of the ACM, May 2003, pp

13. 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.

14. Used for collaboration space modeling
Business
Process
Independent view of
Inter-enterprise events
Enterprise
Illustration of Perspective: Trading Partner vs. Independent
Trading Partner view of
Inter-enterprise events (upstream vendors and downstream customers)
Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies
Used for collaboration space modeling
SOURCE: Adapted from ISO , K. Morita

15. COOKIES ELMO SHIPMENT ELMO CASH cookie monster cookie monster
Economic Resource
Economic Agent
COOKIES
from
ELMO
stock-flow
Economic Event
SHIPMENT
Economic Agent to
cookie
monster
initiating transfer
duality
responding transfer
Economic Agent to
ELMO
stock-flow
Economic Event
PAYMENT
Economic Agent
from
Economic Resource
cookie
monster
CASH
REA model of cookie sale from independent (collaboration space) perspective

16. Identifying Economic Exchanges
The Merchant of Venice receives funding from outside investors. His goal is to purchase silk in China and sell it to the wealthy people in Italy. To accomplish this goal, he first purchases a boat. Next he hires a deck hand to captain the ship to China and back. While in China, the manager negotiates with silk sellers and purchases silk. When the return trip is completed, the Merchant of Venice pays the deck hand, and sells the silk. After retaining a portion of the proceeds for himself, the remaining proceeds from the venture are distributed among the investors according to the amount of their original investment.

17. Merchant of Venice – Economic Exchanges
Get cash from investor, give cash (principal plus return) to investor
Give cash to silk merchant, get silk from merchant
Give silk to wealthy people, get cash from wealthy people
Give cash to ship builder, get ship from ship builder
Give cash to deck hands, get service from deck hands
Give cash to merchant, get services from merchant

18. ER Diagrams ER DIAGRAMS ARE NOT FLOWCHARTS!!!!!!
REA/Business Process – Show the events, resources and agents in a business process and relationships between them
Data Model –Show the key entities to store data about (tables) and relationships between them which must be captured (primary/foreign key relationships and M:M tables)
Entity: events, resources or
agents
Describes the Relationship between
entities
ER DIAGRAMS ARE NOT FLOWCHARTS!!!!!!

19. Basic REA Template for an Economic Exchange
Resource
Increasing
Event
Internal
Agent
get by
from
External
Agent
for to
Resource
Decreasing
Event
Internal
Agent
give by

20. Basic REA Template for an Economic Exchange -- Revenue
Inventory
Goods
Delivery
Shipping
Clerk
give by to
Customer
for
from
Cash
Cash
Receipt
Cash Rects
Clerk
get by

21. Timing of Events
Generally, ERD’s are drawn with the events listed from top to bottom in the order they take place
For revenue, the two events making up the exchange may occur
At the same time (a cash sale)
With the delivery first (a sale on account)
With the cash receipt first (customer prepays or makes a deposit)

22. Basic REA Template for an Economic Exchange – Expenditure
Inventory
Goods
Receipt
Receiving
Clerk
get by
from
Vendor
for to
Cash
Cash
Payment
Cash Pmts.
Clerk
give by

23. REA Data Modeling
Step 1: Identify Events -- Store information about events we want to plan, execute or evaluate; list these down the center of the ER
Step 2: Identify Resources Influenced by Events -- Resources are often assets of the business that we wish to track information about; List these to the left of the events on the ER.
Step 3: Identify Agents Involved in Events -- Usually one internal agent and one external agent. List these to the right of the events on the ER.

24. REA Data Modeling, continued
Step 4: Identify Attributes of Events, Resources and Agents -- Selection of attributes determines what information we later have to make reports, etc.
Step 5: Identify Relationships between Events, Resources and Agents -- Words in the box are unimportant, but you may want to use the basic terminology used in the templates

25. Identifying Attributes
Eventually, we will become much more exacting about the attributes stored when we create database tables. For now, attributes help to understand what is being modeled
For events, think of all of the things that would be on the paper document used to capture information about the event
For resources and agents, this is their master file information

26. Basic REA Template for an Economic Exchange – Revenue
Inventory
Goods
Delivery
Shipping
Clerk
give by to
Customer
for
from
Cash
Cash
Receipt
Cash Rects
Clerk
get by

27. Attributes - Revenue
Goods Delivery – Date, Dock shipped from, customer, items shipped, qty.
Cash Receipts – Date, Place received, customer, amount received
Inventory – Item Number, description, qty on hand
Cash – Account/Drawer Number, Bank/Location, Description, Balance
Customer – Customer Number, Name, Address, Contact, Credit Limit, Balance
Shipping Clerks, Cash Receipts Clerks – Employee Number, Name, Address, Department

28. More on Attributes – Inventory
Inventory items can be either
generic inventory items – ones that we always keep in stock where we keep a catalog of the items we sell; The data table for generic inventory items is basically a listing of the items in our catalog and QOH
unique inventory items – custom made items that will each have a unique identifier (think job order costing). The data table for unique inventory items is a listing of all of the individual items (or groups of identical items called jobs) produced
YOU SHOULD ALWAYS ASSUME GENERIC INVENTORY ITEMS, UNLESS IT IS SPECIFICALLY STATED OTHERWISE

29. More On Attributes – Cash
The cash resource represents cash on hand or in the bank. The data table storing information about cash looks like one of the following
For cash on hand – A listing of all of the cash drawers in all of our stores and the amount of cash that should be in each one
For cash in the bank – A listing of all of our bank accounts, the bank and the balance

30. Basic REA Template for an Economic Exchange – Expenditure
Inventory
Goods
Receipt
Receiving
Clerk
get by
from
Vendor
for to
Cash
Cash
Payment
Cash Pmts.
Clerk
give by

31. Attributes - Expenditure
Goods Receipt – Date, Dock where received, vendor, items received, qty.
Cash Payments – Date, Cash Account Number, Vendor, amount paid
Inventory – Item Number, description, qty on hand
Cash – Account/Drawer Number, Bank/Location, Description, Balance
Vendor – Vendor Number, Name, Address, Contact, Credit Limit, Balance
Receiving Clerks, Cash Payments Clerks – Employee Number, name, Address, Department

32. Basic REA Template for an Economic Exchange – Payroll
Employee
Service
Get Employee
Service
Time Ticket
Production
Supervisor
get by
from
Employee
for to
Cash
Cash
Payment
Payroll
Clerk
give by

33. REA Data Modeling, Continued
Step 6: Cardinality and Optionality -- For each entity pair there are really TWO DIFFERENT relationships
Focus on a single example of one of the two entities
Cardinality -- How many instances the entity on the other side of the relationship can be associated with that single entity?
Optionality -- At ANY possible point in time, does a relationship have to exist between the entity and the one on the other side, or is it simply possible for a relationship to exist?
Reevaluate, starting with a single example of the other entity in the relationship

34. Cardinality and Optionality Example
Cash Payment
Vendor
sent to
Single Payment
How many vendors associated with single payment?
Only one (no crows feet)
Does payment always have to have a vendor?
Yes (vertical line)
Notice where this symbol goes

35. Cardinality and Optionality Example
Cash Payment
Vendor
sent to
Single Vendor
How many payments associated with single Vendor?
Can be many (crows feet)
Does Vendor always have to have a payment?
No – goods received, no payments yet (circle)
Notice where this symbol goes

36. Basic REA Template for an Economic Exchange -- Conversion
Finished
Goods
Inventory
Manufacture Goods
(Production Order)
Production
Supervisor
get by
for
for
for
Production
Supervisor by
Issue RM
(Materials
Requisition)
Raw Materials
Inventory
Storeroom
Clerk
give
from
Production
Supervisor
Production
Supervisor by by
Use Machines
(machine Log)
Use Employee
Service
(Time Ticket)
Machine
Time
Machine
Operator
Employee
Service
Employee
give
from
give
from

37. Attributes - Conversion
Manufacture Goods/Production Order – Date, factory number, supervisor, item to produce, qty.
Use Raw Materials/Materials Requisition -- Date, Storeroom Clerk, Production Employee, Items Issues, Production Order, Qty Issued
Use Employee Service/Time Ticket – Date Employee, Production Order, Hours Worked, Job Code
Use Machine Time/Machine Log – Date, Machine Operator, Machine, Hours used, Production Order
Employee Service – Job Code, Description, Capacity
Machine Time – Machine Number, Machine Use, Capacity
FG/RM Inventory – Item Number, description, qty on hand
Production Supervisor, Storeroom Clerk, Employees, Machine Operators – Employee Number, name, Address, Department, YTD earnings

38. Conversion Key Points
There is NO CASH INVOLVED, but Economic Exchange Still Exists – Get Finished Goods, Give up employee service, machine time, raw materials
The Economic Exchange is within the organization
Because all events are internal, there may not be two agents for each event; Most often, the ones deleted would be the production supervisor (authorizer) in the ‘use machine time’ and ‘use employee service’ events
Often, all of these events are recorded using a single document (i.e. a record of a good being assembled; called a job cost sheet); the process illustrated here would be used in a large manufacturing operation
The Manufacture Goods event can take place over a course of time (several hours, days or weeks). We may record sub-events – i.e. start production, complete production

39. Simultaneous Production and Consumption
Definition – When a single resource is received or created at the same time it is used or delivered.
Simultaneous production and consumption takes place with all services. Unlike goods where there is one event where we get the good (goods receipt) and a separate one where we give it (shipment), for services, give and get occur simultaneously because services cannot be stored
Because of simultaneous production and consumption, the Give Employee Service pattern for conversion is the same as the Get Employee service template shown for payroll, except it says “GIVE” rather than “GET”
These are really the same event because we simultaneously get (produce) and give (consume) the employee’s service.
Despite the fact that they are the same event, sometimes, the event is recorded two different times, once to pay payroll (the get) and separately to track it for job costing purposes (the give); A better design is to record the event only once, on the time ticket, and use the data for both payroll and job costing (as we will assume)

40. Ontological Extensions to the REA Model (Geerts and McCarthy)
Type images for basic objects allows specification of policies and controls plus abstract specification of negotiation components
Commitment images for economic events allows specification of contracts and agreements
State machine model allows specification and ordering of business events as collaboration space messaging and/or internal workflow
Aggregation of binary collaborations allows mediated collaboration with third parties
SOURCE: Geerts and McCarthy, The Ontological Foundations of REA Enterprise Information Systems, 2003.

41. Bilateral Collaboration Economic Resource Type Mediated Collaboration
ISO Open-edi Ontology Collaboration Model
Bilateral Collaboration
governs
Economic Event
Economic Resource
Economic Agent
stockflow
from to
Economic Contract
Economic Commitment
reciprocal
fulfills
establish
duality
Economic Resource Type
typifies
specifies
Economic Event Type
Business Role
qualifies
reserves
involves
Partner
Third Party
Mediated Collaboration
Business Transaction
participates
requires
Agreement
Regulator
constrains
SOURCE: Adapted from ISO , W.E. McCarthy