JAMES A. HALL - Accounting Information System Chapter 10

Accounting Information Systems, 6th edition

James A. Hall

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Objectives for Chapter 10Economic foundations of the REA modelKey differences between traditional ER

modeling and REA modelingThe structure of an REA diagramCreate an REA diagram by applying the

view modeling steps to a business caseCreate an entity-wide REA diagram by

applying the view integration steps to a business case

Traditional Approaches:User-View OrientationWhen data-modeling and IS design

is too oriented toward the user’s views, problems arise:multiple information systemsduplication of datarestricted user-view leads to poor

decision-makinginability to support change

REA is 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 structurecollects detailed financial and non-financial

datasupports accounting and non-accounting

analysissupports multiple user viewssupports enterprise-wide planning

Resources, Events, and Agents Model

Resources, Events, and Agents ModelREA models consists of three entity types and the associations linking them.

ResourcesEventsAgents

Resources in the REA ModelResources – the ‘assets’ of the company

things of economic valueobjects of economic exchanges able to generate

revenueobjects that are scarce and under the control of

the organizationcan be tangible or intangible

Does not include some traditional accounting assets:artifacts that can be generated from other primary

datafor example, accounts receivables

Events in the REA ModelEvents are phenomena that effect

changes in resources.a source of detailed data in the REA

approach to databasesEvents fall into two groups:

Economic – increases or decreases resources

Support – control, planning, and other management activities; but do not directly affect resources

Agents in the REA ModelAgents can be individuals or departments.Participate in eventsAffect resources

Have discretionary power to use or dispose of resources

Can be inside or outside the organizationClerksProduction workersCustomersSuppliers, vendorsDepartments, teams

EconomicResource

Economic Event

External EconomicAgent

Internal EconomicAgent

Stock Flow

Duality

Participates

Participates

Elemental REA Model

Resources, Events, and Agents Model

Another key feature of the REA model is economic duality.Events occur in pairsRepresent the give event and receive event of an economic exchange

Resource AGive EconomicEvent

External Agent

Internal Agent

Out Flow

Duality

Inflow Receive EconomicEvent

External Agent

Internal Agent

Resource B

Participates

Give Activity

Receive Activity

Participates

Participates

Participates

REA Model showing Duality of a Give and Receive Exchange

ER Diagrams (ERD’s) versus REA Diagrams (READ’s)Classes of entities

ERD’s – one class READ’s – three classes (resources, events, and agents)

Arrangement of entitiesERD’s – determined by cardinality and readabilityREAD’s – organized into constellations by class

Sequencing of eventsERD’s – staticREAD’s – chronological sequence of business processes

Naming conventionsERD’s – all nounsREAD’s – nouns (R’s and A’s) and verbs (E’s)

View Modeling: Creating an Individual REA DiagramView modeling is a multistep process for

creating an individual REA model. The result is a single view of the entire

database. The four steps involved are:

1.identify the event entities to be modeled2.identify the resource entities changed by events3.identify the agent entities participating in events4.determine associations and cardinalities

between entities

Step 1: Identify the Event EntitiesIdentify the events that are to be

included in the modelInclude at least two economic events (duality)May include support eventsArrange events in chronological sequence

Focus on value chain eventsDo not such invalid events such as:

bookkeeping tasksaccounting artifacts, e.g., accounts receivable

Take Order

Receive Cash

Verify Availability

Ship Product

Arrangement of Events Entities in Order of Occurrence

Order of Events

Events

Step 2. Identify the Resource Entities

Identify the resources impacted by events identified in step 1

Each event must be linked to at least one resource.Economic events directly affect

resourcesSupport events indirectly affect them

Step 3. Identify the Agent Entities

Each economic event entity in an REA diagram is associated with at least two agent entities. One internal agent One external agent

It is possible to have only an internal agent when no exchange occurs, as with certain ‘internal’ manufacturing processes.

Inventory

Take Order

Customer

SalesRepresentative

Receive Cash

Cash ReceiptsClerk

Shipping Clerk

Cash

Customer ServicesClerk

Verify Availability

Ship Product

Customer

REA Model showing Events and Related Resources and Agents

Customer

Inventory

Inventory

Customer

Resources Events Agents

Step 4. Determine Associations and Cardinalities between Entities

Association – reflects the nature of the relationship between two entitiesRepresented by the labeled line connecting the entities

Cardinality – the degree of association between the entities Describes the number of possible occurrences in one entity

that are associated with a single occurrence in a related entity

Cardinality reflects the business rules that are in play for a particular organization. Sometimes the rules are obvious and are the same for all

organizations.Sometimes the rules differ, e.g., whether inventory items are

tracked individually or as quantity on hand.

Inventory Take Order

Customer

SalesRepresentative

Reserves

Respond to Customer

Process Order

IncreasesReceive Cash Cash Receipts

Clerk

Shipping Clerk

Cash

Places Order

Relatedto

ProcessesRemittance

Customer ServicesClerk

Verify AvailabilityReview Items Available

Request

Ship Product

Causes

Customer

Reduces

Duality

Ships

Remits

Receives

Associations and Cardinality in REA Diagram

Many-to-Many AssociationsMany-to-many (M:M) associations

cannot be directly implemented into relational databases.

They require the creation of a new linking table. This process splits the M:M association

into two 1:M associations.The linking table requires a ‘composite

primary key’.

Inventory Take Order

Customer

SalesRepresentative

Process Order

Shipping Clerk

Places Order

Ship Product

Causes

Customer

Ships

Receives

Inventory-Order Link

Inventory-Ship Link

Link Tables in REA Diagram

Verify AvailabilityInventory-VerifyLink

View Integration: Creating an Enterprise-Wide REA Model

View integration – combining several individual REA diagrams into a single enterprise-wide model

The three steps involved in view integration are: 1. consolidate the individual models2. define primary keys, foreign keys, and

attributes3. construct physical database and produce

user views

Step 1. Consolidate the Individual ModelsMerging multiple REA models requires

first a thorough understanding of the business processes and entities involved in the models.

Individual models are consolidated or linked together based on shared entities.For example, procurement (expenditures) and sales

(revenue) both use inventory and cash resource entities.

Inventory Take Order

Customer

Sales Rep

Receive Cash Cash Rec Clerk

Shipping Clerk

Cash

Cust Ser Clerk

Verify Availability

Request

Ship Product

Customer

Get TimeSupervisor

Worker

Payroll Clerk

Order Product

Purchasing Clerk

Supplier

Receive Product

Disburse CashCash Disb Clerk

Supplier

Receiving Clerk

Integrated REA Diagram

(Employee)

(Employee)

(Employee)

(Employee)

(Employee)

(Employee)

(Employee) (Employee)

(Employee)

(Employee)

Step 2. Define Primary Keys, Foreign Keys, and Attributes

Implementation into a working relational database requires primary keys, foreign keys and attributes in tables.Primary key – uniquely identifies an instance

of an entity (i.e., each row in the table)Foreign key – the primary key embedded in the

related table so that the two tables can be linked

Attribute – a characteristic of the entity to be recorded in the table

Rules for Foreign KeysPrimary key Foreign key: Relations are

formed by an attribute that is common to both tables in the relation.

Assignment of foreign keys:if 1 to 1 (1:1) association, either of the

table’s primary key may be the foreign keyif 1 to many (1:m) association, the primary

key on one of the sides is embedded as the foreign key on the other side

if many to many (m:m) association, create a separate linking table with a composite primary key

Attributes

Financial Customer name Customer address Customer telephone numberAmount owed by customerValue of total sales to dateTerms of trade offered

NonfinancialCustomer credit ratingDamaged goods recordOn-time payment recordCustomer volume recordEDI accessInternet access

Using the customer as an example, these data include:

Step 3. Construct Physical Database and Produce User Views

The database designer is now ready to create the physical relational tables using software.

Once the tables have been constructed, some of them must be populated with data.Resource and Agent tables

Event tables must wait for business transactions to occur before data can be entered.

The resulting database should support the information needs of all users.SQL is used to generate reports, computer screens, and

documents for users.

User-Views

User-View #1

Past Due AccountsName AmountJames $500.00Henry $100.00 … …

Sales Report

User-View #2

REA Database

Value Chain AnalysisCompetitive advantages from the REA

approach can be see via value chain analysis. 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.

Revenue

Costs

Firm Infrastructure

Human resource managementTechnology development

Procurement

Inbound Logistics

OperationsOutput

LogisticsMarketing

& SalesService

Sup

port

Act

ivit

ies

Primary Activities

Margin

Competitive Advantages of the REA ModelUsing REA can lead to more efficient operations.

Helps managers identify non-value added activities that can be eliminatedIncreasing productivity via elimination of non-value

added activities generates excess capacityStoring both financial and nonfinancial data in

the same central database reduces multiple data collection, data storage, and maintenance.

Using REA can lead to more efficient operations.Detailed financial and nonfinancial business data

supports a wider range of management decisionssupporting multiple user views (e.g., different

perspectives on a problem)Provides managers with more relevant, timely,

and accurate information. leading to better customer service, higher-quality

products, and flexible production processes

Competitive Advantages of the REA Model