REA Method Accounting Information System -Cleta D’Souza MBA 731-Fall 2007 Economic Event Economic Agent Economic Resource duality.

REA Method Accounting Information System

- Cleta D’SouzaMBA 731-Fall 2007

EconomicEvent

EconomicAgent

EconomicResource

duality

AIS- Accounting Information System

“An accounting information system is one that captures, stores, manipulates, and presents data about an organization’s value-adding activities to aid decision makers in planning, monitoring, and controlling the organization”

REA• Resources, Events, Agents (REA) is a model of how an accounting

system can be reengineered for the computer age. • REA stands for,

R- ResourceE- EventA- Agent

• REA accounting model is developed using data modeling techniques• Its structure consists of sets representing economic resources,

economic events and economic agents and the relationships that exists between them

• REA was originally proposed in 1982 by William E. McCarthy as a generalized accounting model, and contained the concepts of resources, events and agents.

Year Title Author IdeasEvents Accounting

1969 An ‘events’ approach to basic accounting theory

Sorter Events accounting

Disadvantages of Value theory

Operational rules1970 Towards an "events" theory of

accountingJohnson Forecast and observational verification

criteria

Definition of permissible  aggregation

Mathematical model1962 An inductive approach to accounting

theorySchrader Difference between observed data and

manipulated data

TABLE 1 Categorization of Accounting Frameworks

Database Accounting

1971 A unified approach to the theory of accounting and information systems

Colantoni, Manes and Whinston

Introduction of database concepts

Event coding

Key algebra

1975 A structuring of an events-accounting information system

Lieberman and Whinston

Three part structure

User-defined database characteristics

Self-organizing database capabilities1976 Design of a multi-dimensional

accounting systemHaseman and Whinston

Hierarchical organization of events database

Definition of restructuring functions1977 A relational approach to accounting

modelsEverest and Weber

Data independence

Normalization

1939 What's wrong with accounting? Goetz Maintain an unadulterated Basic Historical Record

1949 Management planning and control Goetz Basic Pecuniary Record plus a legal-financial supplement

1948 Pretiale Wirtschaftslenkung, Volume 2 [Pretiale Lenkung]

Schmalenbach Develop a basic accounting system with no particular objective (a Grundrechnung)

1979 An entity-relationship view of accounting models

McCarthy Second generation data modeling

Artifact-free design

Semantically-Modeled Accounting

REA Accounting

1982 The REA accounting model:  A generalized framework for accounting systems in a shared data environment

McCarthy REA accounting model

Generalization hierarchies

Semantic expressiveness

Enterprise-wide conceptual schema

Features of REA

• An extension of the conventional accounting models to include management information needs of managerial decision models and non financial measures of effectiveness.

• Rea Model provides shared data access to accountant and non accountants

• A generalized E-R representation of an accounting phenomena.

• REA helps represent traditional accounting debit-credit phenomena.

• REA explores the issues of database design and E-R accounting methodology, to include the concept of generalization.

• REA replaces bookkeeping schemes with an accounting framework whose structure is derived with semantic modeling and whose elements correspond to the accounting principles.

Steps

1. Database design process where needs of both accountants and non accountants are serviced through shared access to centrally stored data.

- Conceptual schema, defines entities, their properties and relationships.

2. E-R representation of the accounting phenomena. (REA Accounting Model)

Database Design Process

• Database design- Requirements analysis- View modeling- View integration

REA Data Model- Elements• Economic Resources

Includes objects that are scarce and have utility under control of an enterprise(includes Assets except Accounts receivables)

• Economic Eventsa class of phenomena which reflects changes in scarce means resulting from production, exchange, consumption and distribution

• Economic AgentIncludes persons and agencies who participate in the economic events or who are responsible for the subordinates participation.

- Economic UnitsA subset of economic agent, are inside the economic agents- work for the economic agent or are part of the enterprise.

• Control Relationship/ParticipantA three way relation between an event, an insider agent (unit) and a outsider (agent).

Generalizing of Data

• When all the generalized elements are combined the E-R framework as shown below results.

Economic Resource

Economic Event

Inside Agent

Outside Agent

Outside Agent

Inside Agent

Economic Event

Economic Resource

Outflow

Inflow

Duality

Participant

Participant

Give

Take

REA Template

Inventory

Sale

Sales Person

Customer

Cashier

Cash Receipt

Cash

Outflow

Inflow

Duality

Participant

Participant

Give

Take

Revenue Process using REA Model

Sale

ReceiveCash

Inventory

Cash

Customer

Employee

Customer

• The relationship between customer and sales is a 1:N relationship. We make the primary key for the entity that occurs only once (customer) serve as a foreign key in the entity that can occur many times (sale).

EXAMPLE

Table Name Primary Key Foreign Key Other AttributesSale Sale No. Customer No., Employee No. Date of Sale, Time of Sale,

Total Amount of SaleReceive Cash Cash Rect. No. Employee No., Customer No.,

Sale No., Account No.Receipt Date, Receipt Time, Total Amount of Receipt

Inventory Item No. Description, List PriceCash Account No. Bank, Type of AccountCustomer Customer No. Customer Name, Customer

Address, Customer PhoneEmployee Employee No. Employee Name, Employee

Address, Employee Phone, Job Title

Sales-Inventory Sale No.-Item No.

Quantity Sold, Actual Price

Where can REA be applicable?

Labeled as an accounting system.Can be used for various other business functions.

1. Supply chain collaboration2. inventory control

(assigning goods to resources, transfers to events, and owners to agents.)

3. for payroll by assigning lengths of time to resources(assigning time cards to events, and employees to agents.)

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.

References• Dunn, Cheryl L, and William McCurthy. "The REA Accounting Model:

Intellectual Heritage and Prospects for Progress." Michigan State Uniiversity. http://www.msu.edu/user/mccarth4/DUNN&MC.htm (accessed November 4, 2007).http://www.msu.edu/user/mccarth4.

• McCarthy, William. "An Entity-Relationship View of Accounting Models." The Accounting Review, 1979.

• McCarthy, William. "The REA Accounting Model: A Generalized Framework for Accounting Systems in a Share Data Environment." The Accounting Review, 1982.

• Romney, and Steinbart. "Implementing an REA Model in a Relational Database." In Accounting Information Systems, by Romney and Steinbart. Prentice Hall Publishing, 2006.

• Wikipedia. http://en.wikipedia.org/wiki/Resources,_Events,_Agents (accessed November 3, 2007).