REA (Resources, Events and Agents)

Three “Events” That Define an REA Methodologyfor Systems Analysis, Design, and Implementation

by

Julie Smith DavidArizona State University

April 7, 2023

Preliminary, please do not quote without the author’s permission.

The author would like to thank the students at Arizona State University and the participants of the ASU REA Research Roundtable for both their patience with earlier versions of this paper and their thoughtful suggestions. The insights provided by Joe Schultz and an anonymous reviewer are also appreciated very much.

Three “Events” That Define an REA Methodologyfor Systems Analysis, Design, and Implementation

ABSTRACT

While the original representation of the REA theory of accounting (McCarthy 1982) included explicit definitions for resources, events, and agents, other researchers have extended and modified the theory. This paper builds upon this literature to explicitly identify and define three different types of events: economic events, business events, and information events. Economic events are those which change the quantity of a resource, such as sale and cash receipt. Business events are additional events that provide the organization with new information which management can use to better plan, monitor, and control the economic events. For example, place purchase order is a business event because it provides management with new information: goods are scheduled for receipt, and prices are negotiated. Information events are processes that are performed solely to capture or communicate information about the business and economic events. These include activities such as generate invoice, print A/R aging report, and display customer history.

An REA methodology is then developed to illustrate how these three levels of analysis can be used for systems design and implementation projects. By restricting early analysis to the economic events, value-added activities are identified. When expanding the analysis to include business and information events, one is required to justify every additional process necessary to implement an economic event. Therefore, this methodology can provide a framework for implementing world-class solutions such as reengineering.

This research is valuable to both academics and practitioners. This methodology can be used in practice to help design and implement systems that will support both financial and non-financial information needs. In addition, using the REA methodology to guide systems projects will force management to recognize implementation compromises every time they add an activity to a business process or modify the system to reduce their ability to trace costs. This methodology also provides a framework for academics. By developing more precise definitions of events and the REA methodology, future empirical REA research could incorporate these definitions to design more rigorous tests of the costs and benefits associated with implementing REA systems.

Three “Events” That Define an REA Methodology for Systems Analysis, Design, and Implementation

INTRODUCTION

The accounting profession is undergoing radical change as it strives to provide value in

today’s automated society. Many argue that financial measures of performance are no longer

adequate and the profession must expand its domain if it is to continue (although this discussion

was initiated over 20 years ago, recent examples include Eccles 1991 and Elliott 1994). In

response to these concerns, there has been a call to expand the scope of Accounting Information

Systems. For example, Stambaugh and Carpenter (1992) discuss the importance of executive

information systems in organizations and opportunities for accountants to design, implement,

and control the data necessary to support senior management. Rather than merely focusing on

financial analysis, Brecht and Martin (1996) identify opportunities for accountants to participate

in the development of strategic systems that focus more on business opportunities.

In the midst of these rising concerns, McCarthy (1982) proposed an alternative approach

to capturing information about accounting phenomena. Rather than focusing on debits and

credits, which by design omit important data about economic events, he recommended capturing

the detail about each resource under the firm’s control, the events that change the amount of

each resource, and the agents who participate in these events (termed REA analysis for

Resources, Events, and Agents). Since REA was introduced, many papers have been written that

provide REA system implementations (Gal and McCarthy 1983 and Denna et al. 1992), rigorous

applications of REA (Denna et al. 1994 and Grabski and March 1994), and empirical analyses of

REA (Dunn 1994 and David 1995). As a result, more people have been exposed to the concepts,

the ideas are becoming more accepted, and they are being integrated into today’s accounting

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information systems texts (Hollander et al. 1996, Gelinas and Oram 1996, and Romney et al.

1997).

The REA framework can be used for more than designing databases. Adopting this

approach enables accountants to become valued business partners, shifting our focus from

financial performance and control to a broad business focus, as recommended by Brecht and

Martin (1996). This paper illustrates how the REA concepts can be used as a guide during

business analysis and can help identify strategic opportunities for organizations.

The first step in describing the REA methodology for business analysis is to provide

explicit definitions of each construct in the model, and to show how these constructs work

together. This is important because some of the definitions of REA have been modified, the

overall template has been expanded, and some of the initial concepts have been de-emphasized.

For example, in Denna et al. (1993), the definition of “events” is broader than McCarthy’s

(1982) definition of event, and location has been added, expanding the model to “REAL”

analysis.

The second focus of this paper is to provide a methodology that will incorporate the

different definitions of events to describe two different stages of REA analysis. This REA

methodology is a flexible tool for understanding businesses, guiding new system design projects,

and structuring accounting information systems courses. Adopting this approach to accounting

will change more than the data that is captured by accountants. It will help accountants to

embrace a business focus and assist in strategic decisions critical to firm success.

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The following section of this paper provides an overview of the REA approach to

accounting. It defines and describes three different types of events that are critical to today’s

businesses: economic events, business events, and information events. Section III of the paper

provides an overview database implementations from REA diagrams. The next section

summarizes the methodology while the fifth describes how it may be applied to current business

process analysis in reengineering projects. Conclusions and extensions are discussed in the final

section.

DEFINING “EVENTS” IN REA ANALYSIS

To successfully analyze an organization and redesign its systems, a delicate balance must

be made between learning enough about the business to understand the forces that drive its

operations, and focusing too much on the current environment. If the analyst does the former,

she may be unable to meet current users’ expectations of future systems. If the latter is

performed, it is more difficult to identify radical, creative solutions that break with tradition

(Yourdon, p. 322). REA can be a powerful tool in this process because it can be used perform

value chain analysis (Porter 1985). With REA analysis, analysts and managers limit their view

of their complex organizations to their most basic elements, highlighting activities that consume

valuable resources while adding value for customers. In addition, the REA methodology forces

designers to critically evaluate every non-value adding activity.

A key to using an REA approach in business analysis projects is understanding three

different types of events that are important to organizations: economic, business, and

information. By understanding the differences between these events, users are able to prepare

documentation at varying levels of detail, analyze the organization’s key business processes, and

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communicate several types of business information to users. The following subsections will

define the three different classes of events and how they relate to the REA design methodology.

These definitions will be illustrated with a simple, hypothetical company: The Merchant

of Venice. This company has one manager who 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 will negotiate with silk sellers and purchase silk. When the return

trip is completed, the manager will pay the deck hand, and sell the silk.

Economic Event-Level Analysis -- An Introduction to REA

Identify and Document Individual Exchanges

The first step in performing REA analysis to identify the events that increase or decrease

the quantity of a firm’s resources, termed economic events. Specifically, McCarthy (1982)

incorporated Yu’s (1976) definition of events: “a class of phenomena which reflect changes in

scarce means (economic resources) resulting from production, exchange, consumption and

distribution” (p. 562). Examples of economic events are sale, cash receipt, purchase, and raw

material issue.

Resources are defined as “objects that are (1) scarce and have utility and (2) are under the

control of an enterprise” (Ijiri 1975 as quoted in McCarthy 1982 p. 562). Common examples of

resources are cash, inventory, and fixed assets.

Agents are the third component in REA and are defined as those who participate in the

events. For each event, two agents must be identified: one within the business unit who was

responsible for the event, and the second, outside the business unit, with whom the event was

performed. The outside agent is often outside of the organization, such as a customer or vendor.

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However, if the transaction is a transfer of resources between two business units, the internal

agent will be the one giving up the resource, while the external agent will be the one receiving it.

Identifying the individuals responsible for each transaction helps control the economic resources.

If there is a problem with the quantity of a resource, an auditor is able to trace the transactions to

individuals. Outside agents may be individuals, or, more likely, other firms that are interacting

with the firm being modeled. Examples of internal agents include salesperson, supervisors, and

clerks. Outside agents would include vendors, customers, and investors.

REA analysis is also used to document why the firm exchanges resources with outside

agents. Every time the firm reduces the quantity of a resource, its management expects to

receive something in return. Therefore, every event must be related to at least one other event

that is the other half of the economic exchange. The relationship between the increment and

decrement events is called a duality relationship, and the resulting pair of related events is an

economic exchange. For example, when the Merchant of Venice purchases silk, the manager

must give cash to the vendor who is providing the silk. Buying silk and paying cash are both

economic events because the change the quantity of resources. The relationship between these

events is the duality relationship that documents why the firm is willing to give the cash to the

vendor. In total, the two events and the relationship between them are an economic exchange.

In the Merchant of Venice, five exchanges are critical to the business. First, there is an

exchange of CASH1 with the INVESTORS (first the manager gets cash from them, and the

implication is that cash will be paid to them in the future). Second, there is an exchange of

CASH for SHIP, followed by CASH for EMPLOYEE SERVICE and CASH for SILK. Finally,

the manager will exchange SILK for CASH with his CUSTOMERS. Each of these exchanges is

composed of a pair of economic events: CASH RECEIPT - CASH DISBURSEMENT; BUY

1 Upper case words are used to designate specific components of the Merchant of Venice business.

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SHIP - CASH DISBURSEMENT; GET EMPLOYEE SERVICE - CASH DISBURSEMENT;

PURCHASE SILK - CASH DISBURSEMENT; SELL SILK - CASH RECEIPT. Each of these

individual events is an economic event because the quantity of a resource is being increased or

decreased. When linked together with a duality relationship, they become economic exchanges.

It is important to recognize that the duality relationship between two events does not

mean that the events must happen simultaneously, or that one is a precursor to the other. For

example, the merchant enjoyed the EMPLOYEE SERVICE throughout the venture to and from

China. The CASH DISBURSEMENT occurred at a later date.

REA systems are often documented with entity-relationship diagrams. Each resource,

event, and agent can be modeled as an “entity” (shown as a rectangle). The relationships

between the entities are represented by diamonds. This technique can be used to model the

exchanges performed in the business. For example, the Merchant of Venice’s exchanges are

documented in Figure 1.

--- Insert Figure 1 Here ---

Figure 1 only shows the economic events and the duality relationships between them.

This type of diagram is referred to as an entrepreneurial script of the firm (Geerts and McCarthy

1995). Complete economic event-level REA diagrams also include resources and agents,

following the pattern for the “generic” REA diagram shown in Figure 2. This diagram shows

the essential components of an economic exchange and can be used as a template for developing

REA diagrams of organizations.


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Figure 3 shows an expanded entrepreneur script for the Merchant of Venice with the

resources and agents added. Each of the exchanges is modeled separately, and each diagram

follows the generic REA template.

---- Insert Figure 3 Here ---

Perform View Integration

As discussed, the first step in REA analysis is identifying each economic exchange and

modeling them individually, following the REA template. Once that analysis is complete, view

integration must be performed to consolidate the individual exchange diagrams into a company-

wide diagram. The resulting diagram should show all of the events that affect the quantity of

resources, and all of the organization’s exchanges.

Initially, the integration is performed by linking the individual REA diagrams by their

common entities such as CASH or CASH DISBURSEMENT. See Figure 4 for the diagram

showing the first step in integrating the Merchant of Venice’s individual REA diagrams.


To complete the view integration process, the analyst must perform additional analysis to

insure the completeness of the resulting diagram. First, every resource must be studied to

determine if the analyst has identified at least one event to increase the quantity of the resource,

and at least one event to decrease the quantity.

Second, the analyst must verify that every economic event participates in a duality

relationship so there is a complete picture of how the company produces value. During this

process the designer will often be faced with difficult decisions. Why did the firm purchase

fixed assets? How did the firm use of its employee service? These questions are often avoided

in traditional accounting systems either through expensing the resource or applying its usage

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with some allocation method. In REA analysis, the analyst attempts to be more precise and

develop a more thorough representation of the firm that focuses on its value chain, rather than

accounting conventions2.

These difficult questions must be faced even in firms as simple as the Merchant of

Venice. In Figure 4 the analyst has only documented how the EMPLOYEE SERVICE and SHIP

resources are incremented. How were these resources “used up”? They were needed to sail to

China; they were “used up” during the course of the sailing venture. Therefore, the analyst

could add an entity to the diagram to represent the economic event, SAIL SHIP, defined as the

occurrence in time in which decreases the quantity of our SHIP. This does not mean that the

whole ship was used during one venture, but it is the actual sailing of the ship that causes the

wear and tear on the ship. A second event, USE EMPLOYEE SERVICE could be added to

represent the decrement to the EMPLOYEE SERVICE resource.

As is common in business processing, these two decrement events occur simultaneously,

and the firm must expend a bundle of resources to successfully sail to China. The SHIP could

not sail without the DECKHAND. Therefore, an additional relationship can be added to the

diagram to show the link between the two new events. This relationship is an example of a new

type of relationship: synergy relationships3. These relationships are defined as describing

multiple events that occur in conjunction with each other and result in the whole being greater

than the sum of the parts. As discussed in Covey (1989), synergistic situations can lead to

creative solutions to problems and better overall performance than either party could enjoy

2 As discussed in McCarthy 1982, it may not be cost justified to implement a system that captures this detail. However, the E-R diagram should be a model of the business and should show the complete representation of how he firm operates. If necessary, the system may be simplified during the implementation phase. However, all involved in the project should realize that every compromise moves the firm away from complete traceability of its costs.3 This terminology and the analogy from Covey (1989) was recommended by Andrew Kristich.

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individually. In the Merchant of Venice, the SHIP and the EMPLOYEE SERVICE were not

able to provide value to the firm until they were used together.

Once the sailing venture is included in the REA diagram, the analyst must confirm that

every event on the diagram participates in a duality relationship. In other words, the analyst is

going to document what the firm received in exchange for every decrement event so all duality

relationships will be recognized. Having added the SAIL SHIP and USE EMPLOYEE

SERVICE events, the analyst must identify what was received as a result of these events. The

manager was willing to perform the sailing venture because he had identified it as the optimal

method to purchase the silk. In other words, the new decrement events should be related to the

GET SILK event. As shown in Figure 5, this representation shows that more resources were

needed to get the SILK than just CASH. To determine the full cost of the SILK, one must also

consider the costs associated with the SHIP and the EMPLOYEE SERVICE required for the

sailing venture.


If a system is created from this diagram, it would capture the economic realities of the

sailing venture. It would treat the SHIP and EMPLOYEE SERVICE resources very differently

from a traditional accounting system. Historically, accountants have used depreciation to match

fixed asset expenses, such as the SHIP, to revenues. This was an attempt to communicate the

fixed asset’s long term value to the firm, but was an arbitrary estimation of how much cost was

associated with sales. As our information technology has evolved, however, it is possible to

capture more direct measures of asset usage. In an REA system, we would attempt to identify

how the costs were incurred, identify what was received in exchange, and capture the data

necessary to track this phenomenon. In the case of the Merchant of Venice, we would match the

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costs of sailing the SHIP with SILK purchases. We may have to estimate costs based on the

number of sailing ventures we expect the ship to make, but the SILK purchased during each

venture would incur its share of the SHIP’s costs.

EMPLOYEE SERVICE is also handled differently in a complete REA system. The

analyst identified the exchange of GET EMPLOYEE SERVICE and CASH DISBURSEMENT

when evaluating payroll processing. The REA template forced her to recognize the resource

EMPLOYEE SERVICE that is being received by the firm in exchange for CASH. Notice that

while EMPLOYEE SERVICE’s existence is short-lived, it is a resource because it meets the

necessary criteria: it is scarce, provides utility, and is under the firm’s control. If EMPLOYEE

SERVICE was included in the initial analysis, the analyst will recognize that there must be at

least two events related to it during the view integration process. One event must increase its

quantity (GET EMPLOYEE SERVICE), and another will represent how it is used. This

decrement event may not have been identified otherwise. In the case of the Merchant of Venice,

the reduction of EMPLOYEE SERVICE was represented as part of the economic event USE

EMPLOYEE SERVICE that supports the BUY SILK and SAIL SHIP events.

Business Event-level Analysis

For simple organizations, their economic event-level REA diagram would describe all of

the processes in their organization. For example, the Merchant of Venice travels to vendors to

buy goods and later sells them directly to customers; the integrated diagram in Figure 5

adequately describes the processes performed. However, as businesses become more complex,

more activities are often involved in an exchange than the simple give and take. For example,

assume the Merchant chooses to start taking customer orders prior to sailing to China. In

addition, he hires salespeople to make cold calls on potential customers, hoping to interest them

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in fine silk products. The information gathered during these new activities is critical to the

Merchant’s ability to manage the business, but would not have been included in the economic

event-level REA diagram.

Therefore, once the economic event-level diagram of an organization is completed, a

lower level of analysis is needed before a database can be developed or procedures can be

formalized. During this phase of analysis, the definition of event will be expanded to include the

business events that are important to the organization.

Business events are defined as “any business activity that management wants to plan,

monitor, and evaluate” (Denna et al. 47). These events result in changes to the physical world

and provide new information that can be used by the firm’s management to make decisions. This

definition of event includes all of the economic events already discussed. However, they should

continue to be designated as “economic events” because that term is more precise term and

identifies those events used to produce financial information. A business event-level diagram,

therefore, will contain all of the economic events identified in the first phase of analysis, but will

be supplemented with the additional business events.

Examples of business events include requisition goods, place purchase order, and take

customer order. In each of these cases, the events provide management with a better

understanding of future economic events. For the more complex Merchant of Venice, TAKE

CUSTOMER ORDER is an event in which the manager and the customer commit to two future

economic events: it is a promise that the Merchant of Venice will provide SILK to the

CUSTOMER, and that the CUSTOMER will provide a certain amount of CASH for each unit of

SILK they receive. No resources are increased or decreased at the time the TAKE CUSTOMER

ORDER occurs, so this is not an economic event. However, this is a business event because

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once the order is placed, there is new information available to help management plan, monitor,

and evaluate operations. For example, the Merchant will be able to purchase the exact SILK the

CUSTOMER wants rather than estimating demand. Scheduling sailing ventures may be based

on projected sales volumes from the customer orders. By tracking orders, trends in silk

preferences may be identified more quickly, and the Merchant can take proactive steps to better

manage the revenue process. Finally, he may be able to control the sales process by validating

customers, monitoring credit limits, etc. during the TAKE CUSTOMER ORDER business event.

The general relationship between economic and business events is that one economic

event may be supported with several business events. Therefore, analysts should first document

the firm’s economic exchanges. Once that is completed, they can critically evaluate the business

events. To illustrate this relationship, an economic-level and a business-level diagram of the

Merchant of Venice’s revenue cycle are shown in Figure 6.


Continuing the Merchant of Venice example, the analyst studied the sales processing and

identified two events that were necessary to complete a SALE event. First, she identified the

DELIVER ORDER event as the occurrence that actually decreases the quantity of SILK.

Therefore, she renamed the economic event, SALE, as DELIVER ORDER to describe more

explicitly this economic event. Then she documented the additional business event, TAKE

CUSTOMER ORDER, necessary to perform the economic event, DELIVER ORDER. In the

economic event-level diagram shown in Figure 6, there was only one entity used to represent the

transfer of inventory to the customer. This single economic event is decomposed into two events

(highlighted within the dashed square) in the business event-level diagram.

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The analyst also has identified a business event that was not explicitly part of the sales

processing but was important to the revenue cycle: CALL ON CUSTOMER. This is an event

that is performed by a SALESPERSON who travels to the CUSTOMERS, making cold calls.

The Merchant wants to evaluate SALESPERSON productivity, so it is important to monitor how

many CALL ON CUSTOMER events each SALESPERSON performs, and what INVENTORY

items are discussed during these calls. This information could also be valuable for making

promotion decisions, training programs, etc. Therefore, the Merchant of Venice needs to capture

information about the CALL ON CUSTOMER event, even though it is not directly related to

individual sales and does not have a direct effect on any resource other than salespeople’s time.

See Figure 7 for the Merchant of Venice’s complete business event-level REA diagram.


While there is a wide range of additional events that are also included in the business

event category, the goal of the organization should be to have as few business events as possible

to perform the economic event. For example, the best business process of a SALE would be to

have the exact inventory the customer wants materialize at the customer’s site when the

customer places the order. Unfortunately, this is not often possible except in the Star Trek world

of replicators and transporters! As a result, many firms must compromise and add additional

business events such as TAKE CUSTOMER ORDERs, and then, at a later time, actually

transport the goods to the customer.

The business-level REA diagram is a more detailed view of the organization than the

economic event-level REA diagram. However, it should still contain the important information

from the economic event-level diagram. As such, business-level REA diagrams should include

the duality relationships between the economic events, and one should be able to trace the

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quantity of resources through all of their increases and decreases. Therefore, the basic

framework of the economic-level REA diagram is maintained in this more detailed diagram.

Information Event-level Analysis

Information events4 are the third type of events encountered in organizations during

systems analysis projects. These events are defined as “procedures that are performed in

organizations solely to capture, manipulate, or communicate information.” The key distinction

between these events and business and economic events is that no new data is identified

(although the previously identified data may be captured or summarized and reported), and

nothing changes in the physical that the REA diagram has not already described. This type of

event includes the specific implementation methods for capturing data about the resources,

events, and agents, as well as any report generation performed with the data in the system. For

example, if management has identified CUSTOMERS as an important agent to their

organization, the steps performed to gather the information about a customer would not be

included in the diagram (such as COMPLETE CUSTOMER CREDIT APPLICATION).

Another example of an information event is preparing customer invoices. This is a

procedure that management has argued must occur for proper internal control and is performed

by most modern organizations. However, it is neither an event that changes the quantity of a

resource nor supports the transfer of resources. All that it does is communicate information

about what has already occurred: some quantity of goods has been given to the customer, and

they are required to pay a certain amount per unit that was negotiated at the time of the

CUSTOMER ORDER. In fact, both parties already know this information (the organization

through the shipment of the goods, and the customer through their receipt), so neither

organization should reflect the sending or receiving of the invoice as a business or economic

4 These are called “information processes” in Denna et al. 1993.

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event. Rather, each company’s system should maintain the transaction details about the

inventory and cash transactions. If the detailed records and the duality relationship between the

event tables are maintained, the system can calculate the accounts receivable or accounts payable

balances as the difference between the resources received and given. For example, a customer’s

accounts receivable balance would be calculated by summing all of their SALES records, then

subtracting the sum of the CASH RECEIPT records for that customer.

REA diagrams should not be used to document information processes. Their strength

lies in modeling the activities that actually occur and helping management evaluate them.

Information processes, on the other hand, while perhaps necessary in organizations, are merely

processes that either capture or use the information captured about the resources, events, and

agents. While the data required is a design issue, how one chooses to physically capture or

report the information is an implementation issue.

If management determines that these events are required (and only after careful, critical

thought), then other documentation approaches will provide more information about how they

are implemented. For example, systems flowcharts or data flow diagrams could be developed to

show how the actual information processes are performed, and how information is

communicated both within and among organizations.

DATABASE IMPLEMENTATIONS5

Once the resources, business and economic events, and agents have been modeled, the

design phase of the REA analysis project has been completed. Next, the analyst must evaluate

how to implement the system. This discussion provides a brief overview of a database

implementation process.

5 Much of this section is from David 1995.

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First, all of the necessary data about each of the entities should be identified. For

example, all of the data about CUSTOMERs that would be required by the Merchant of Venice

and its salespeople should be identified. CUSTOMER attributes could include name, address,

credit limit, contact name, and phone number. Similar analysis would be performed for each

entity and relationship in the firm’s entity-relationship diagram.

After the important data are identified, the organization’s REA accounting database can

be created by implementing each entity, relationship, and attribute in a centralized data

repository. If using database technology, one table would be created for each entity on the

organization’s business event-level diagram. In addition, the relationships between the entities

must be implemented.6 Once the tables are created, details of each event would be stored as

records within the tables. Once application programs are developed to enter, store, manipulate,

and report this data, an REA accounting information system can provide detailed information

about the business. The records in this database could be sorted and summarized to generate the

same information as in journal entries in a traditional accounting system. However, additional

“views” of the data are available for other system users with different information needs. As a

result, both financial and non-financial information about events can be accessible to all systems

users.

This illustrates how REA accounting systems store much more data than traditional

accounting systems. To a large extent, the main difference between an REA accounting system

and a more traditional one is when data are “filtered.” In an REA accounting system, less

transaction data is filtered before they are stored. The majority of the filtering occurs later when

reports are generated and only the information needed for the report is used. For example,

6 For more information about creating data base tables from E-R diagrams, see Chapter 6 in Romney et al 1997 or McCarthy 1979.

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SALE data can be grouped and summarized by sales person for the sales manager, or by

customer for the marketing manager. If the relationship between SALE and INVENTORY is

also implemented, the data may also be sorted by product for the production manager. In

addition, the data could be summarized to prepare the financial statements when needed by

management or to meet demands by outside institutions (such as the SEC, etc.).

On the other hand, traditional accounting systems place a filter on the data before they

are stored in the system. The journal entries used to store the data limit event attributes to

periodic, summarized financial amounts that can be entered into the General Ledger by account

number. Therefore, the information that can be reported is limited to the account information

that is stored in such a system.

--- Insert Table 1 Here ---

Difficult decisions regarding implementation must be made. Several characteristics of

REA systems were identified in David (1995), and are shown in Table 1. During

implementation, the analyst and managers must perform cost-benefit analysis to determine if

each characteristic should be included in the resulting system. For example, analysts must

determine the best method for capturing the data. In general, capturing data at its origin is

preferable over any method that adds a time lag between the processes and their information

capture. If done in real time, the database users will be able to see a clear view of the

organization any time they process a query.

If this design methodology is used throughout the project, the resulting system should

efficiently processes the critical business and economic events of the organization. The resulting

organization should be streamlined with the elimination of unnecessary business and information

events. By integrating the data, and providing users with a tool with which to extract the data,

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the information events should be kept to a minimum. Users will be able to answer their

questions when they arise, and resources will not be spent generating reports that are never used.

CONSOLIDATION OF CONCEPTS: REA AS A DESIGN METHODOLOGY

Once one understands the unique characteristics of economic, business, and information

events, REA can be used as the foundation of systems design and business process analysis

projects. A general framework for this methodology is presented in Table 2. Points one through

three summarize the analysis steps, while the remaining steps describe implementation issues.


METHODOLOGY EXTENSION: REENGINEERING

As has been discussed since the early REA papers, REA analysis and the resulting E-R

diagrams can be followed by data analysis and database implementation to produce an integrated

data repository. The data can be used to produce financial statements and non-financial reports

to support both predetermined and ad hoc management needs (McCarthy 1982). However, the

REA methodology can also aid reengineering projects.

Reengineering is defined as “the fundamental rethinking and radical redesign of business

processes to achieve dramatic improvements in critical, contemporary measures of performance”

(Hammer and Champy 1993, 32). While this has enjoyed wide-spread coverage (Hammer and

Champy 1993, Davenport 1993, and Coulson-Thomas 1994), one of the most difficult steps in

reengineering is the identification of processes that are good candidates for reengineering.

Hammer and Champy (1993) define a process as “a collection of activities that takes one or

more kinds of input and creates an output that is of value to the customer” (p. 35).

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Unfortunately, they admit that many organizations are unable to think in this fashion because

they are too focused on the individual tasks that are performed throughout their organization.

They are not able to think at a high enough level to identify a process (Coulson-Thomas 1994,

118-119; Davenport 1993, 7). When they document their current systems with traditional

techniques such as flowcharting, they often prematurely focus on the details (Hammer and

Champy 1993, 118-119).

REA analysis can help guide reengineering projects because a process is an economic

exchange, represented by increment and decrement events linked with a duality relationship. By

definition, an exchange represents what resources the firm is using (inputs) in order to increase

other resources (outputs). In addition, integrated economic event-level diagrams show how

resources that are acquired through one exchange are used in another. The agents in the second

exchange are actually the customers for the first. Consider purchasing inventory as an example.

The firm is willing to use CASH to PURCHASE INVENTORY. Thus, INVENTORY is the

output of this exchange. If this company manufactures FINISHED GOODS, the agents in the

manufacturing exchange (USE INVENTORY - MAKE FINISHED GOODS) are the customers

of the purchasing exchange. Any reengineering project concerning the purchasing process must

consider the demands of the manufacturing agent to be successful. As this shows, starting with

an economic event-level diagram can help identify processes as potential reengineering projects.

After identifying a process for reengineering (an economic exchange), management must

identify how to minimize time and costs, improve quality, or whatever other characteristics

management has determined to be key to success. By continuing the REA analysis to the

business-level events, management is forced to justify each additional business or information

event that is added to the process.

21

To illustrate this use of REA, consider one of the most famous reengineering success

stories: Ford Motor Company’s reengineering of their accounts payable processing (Hammer

and Champy 1993, 39-44). Ford management discovered Mazda was able to process payables

with a fraction of the personnel that Ford used. Ford decided, therefore, to reengineer its process

to enjoy the same efficiencies. The first modification Ford made was to automate the receiving

activity so the receiving data was being entered in real time by the receiving clerks, rather than

at a later date from hand-written receiving reports. Next, they automated the 3-way match

activity so vendor invoice amounts were entered and electronically compared to the product of

the quantity of goods received (from the receipts file) and the unit cost of the goods (from the

purchase order file). By automating the process they enjoyed some productivity improvements

in their A/P department, but not the dramatic improvements they had hoped for. Their final

change was to recognize that they did not need to wait for the vendor invoice, but actually had

the information necessary to make a cash disbursement as soon as the inventory receipts were

entered into the system. As a result, they modified their system to automatically generate an

electronic funds transfer to the vendors, in effect pushing any 3-way matching back to the

vendors. Then Ford reaped the benefits!

In REA terms, Ford identified the economic exchange of get inventory (receipt) -- give

cash (cash disbursement) as one that had the potential for radical change. Had they performed

REA analysis at the start, they would have challenged each additional step (i.e., every business

and information event) in the process. The receipt of goods and cash disbursements are

economic events, and are necessary for this exchange to be completed. However, the entering of

a vendor invoice is merely an information event: it “double checks” information that should

22

already be in the system. As such, this is an event that should only be included if absolutely

necessary.

Hammer and Champy (1993) presented several other reengineering examples using

processes that could be identified by studying the critical REA exchanges (see Table 3 for a

summary). In each case, the firms identified a process, and worked to streamline it. The results

were quicker response times, more thorough data for analysis, and more efficient operations.


To use REA in reengineering, management should first prepare an integrated economic

event-level diagram of their firm. Management should then evaluate the value provided by each

economic exchange. This analysis will be performed at a very high level. Next, they should

examine how their business accomplishes (or should accomplish) these processes by designing a

business event-level diagram of the activities. Their goal should be to add NO additional

business events during this process. If they resist adding extra events, they will streamline the

process, and reduce costs and time necessary to complete the exchanges.

Of course, these benefits only occur if the organization has an information system that is

able to generate the required information without incurring additional information steps. In

Ford’s case, they could not make automatic cash disbursements until their system stored the

inventory receipts and purchase orders, and had the capability of linking these events. Referring

back to Table 1, reengineering project success often hinges on information systems that capture

detailed event data and are able to provide integrated information when required.

CONCLUSIONS

This paper extends REA research by formalizing the relationships among three types of

events currently performed within organizations. By focusing on events that change the

23

organization’s economic reality, analysts will be able to assist organizations in streamlining their

processes and eliminating redundant or non-value adding activities. The resulting computerized

information systems will be able to support a wide range of user needs. Financial statements can

be generated by summarizing the detailed economic event data. Internal users will have access

to the detailed data to support ad hoc information requirements that arise throughout the

system’s life.

This work can be used in many situations. First, some consulting firms and organizations

are adopting REA approaches to their systems development projects. Price Waterhouse has

started a practice in “events-based” accounting information systems (Cherrington et al. 1993),

and IBM has modified their systems with input from REA researchers (Denna et al. 1992). As

these concepts are gaining acceptance, they must be communicated to a wider audience. By

presenting a generic methodology for use in systems development projects, this paper may

enhance other consultant’s understanding and opportunities.

To help meet this goal, the REA methodology can add precision to the definition of

“event” and to help students work with challenging REA problems. In addition, if the course is

reorganized with REA as the fundamental framework, students are able to begin with “simple”

situations (economic event-level discussions), graduating to more detailed process

representations (business event-level) of today’s organizations. A final section of the course can

focus on the opportunities available to accountants to provide value to firms they are working

with who, in turn, must provide value to their customers if they are to survive. The application

of REA to reengineering can illustrate its usefulness.

Finally, empirical REA research must continue to examine the relationship between the

REA systems and their more traditional counterparts. It would be valuable for researchers to

24

study differential benefits of systems which process each type of event. For example, do firms

that have fewer information events receive benefits? How many business-level events are being

performed in organizations, and how do their systems support these activities? Weber (1986)

has begun this work by examining Customer Order Processing systems, identifying the inclusion

of customer orders, thus extending the economic-events identified in earlier REA work.

However, there are many more opportunities for others to evaluate the model presented here.

25

References

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Cherrington, J.O., W.E. McCarthy, D.P. Andros, R. Roth, and E.L. Denna. 1993. Event-driven business solutions: implementation experiences and issues. Proceedings of the Fourteenth International Conference on Information Systems. Orlando, FL. p. 294.

Coulson-Thomas, C., ed. 1994. Business process re-engineering: myth & reality. London, England: Kogan Page Limited.

Covey, S.R.1989. The 7 habits of highly effective people. New York, NY: Simon & Schuster.

Davenport, T.H. 1994. Process innovation: Reengineering work through information technology. Boston, MA: Harvard Business School Press.

David, J.S. 1995. An empirical analysis of REA accounting information systems, productivity, and competitive advantage. Ann Arbor, MI: U.M.I. Dissertation Services.

Denna, E. D.P. Andros, and J.O. Cherrington. 1992. "Reengineer your accounting, the IBM way" Financial Executive (July/August, 1992).

_____, E., J. Cherrington, D. Andros, and A. Hollander. 1993. Events-Driven Business Solutions: Today's Revolution in Technology. Irwin, IL: Business One.

______, J. Jasperson, K. Fong, and D. Middleman. 1994. Modeling conversion process events. Journal of Information Systems 8 (1): 43-54.

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Elliott, R.K. 1994. Confronting the future: Choices for the attest function. Accounting Horizons 8 (3): 106-124.

Gal, G. and W.E. McCarthy. 1983. “Declarative and procedural features of a CODASYL accounting system,” in Entity-Relationship Approach to Information Modeling and Analysis, P. Chen (ed.), North-Holland. pp. 197-213.

Geerts, G. and W.E. McCarthy. 1995. “Use of an accounting object infostructure for knowledge-based enterprise models.” Submitted to IEEE Expert.

Gelinas, U. J. and A. E. Oram. 1996. Accounting Information Systems, 3rd ed. Cincinnati, OH: South-Western College Publishing.

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Grabski, S.V. and R.J. Marsh. 1994. Integrating accounting and manufacturing information systems: An ABC and REA-based approach. Journal of Information Systems. 8 (2): 61-80.

Hammer, M. and J. Champy. 1993. Reengineering the Corporation: A Manifesto for Business Revolution. NY, NY: HarperBusiness.

Hollander A., E. Denna, and O. Cherrington. 1996. Accounting, Information Technology, and Business Solutions. Chicago, IL: Richard D. Irwin.

Ijiri, Y. 1975. Theory of Accounting Measurement (American Accounting Association). (Quoted from McCarthy 1982).

McCarthy, W.E. 1979. An entity-relationship view of accounting models. The Accounting Review (October): 667-686.

______. 1982. The REA accounting model: A generalized framework for accounting systems in a shared data environment. The Accounting Review (July): 554-77.

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27

CashReceipt

CashDisbursement

BuyShip

GetEmployeeService

Purchase Silk

CashSellSilk

CashDisbursement

CashDisbursement

CashDisbursement

Receipt

Figure 1: Exchanges Important to the Merchant of Venice

28

29

Resource

Resource Event (+)

Event (-)

InsideAgent

OutsideAgent

InsideAgent

OutsideAgent

Stock flow

Duality

Control

Stock flow

Control

Adapted from McCarthy 1982

Figure 2: Generic REA Template

30

Cash

Cash

Get Financing(Cash Receipt)

CashDisbursement

Investor

Manager

EmployeeService

Cash

Get EmployeeService

CashDisbursement

Manager

DeckHand

Silk

Cash

Sell Silk

CashReceipt

Manager

Customer

Manager

Cash

Silk

Cash

PurchaseSilk

CashDisbursement

SilkSeller

Manager

Cash CashDisbursement

Ship

Cash

Buy Ship

CashDisbursement

Manager

ShipBuilder

Manager

Manager

Manager

Manager

Figure 3: Individual REA Diagrams for the Merchant of Venice

31

Sell Silk

CashReceipt

Manager

Customer

Ship

Manager

Silk

Cash

Get Silk

CashDisbursement

Manager

SilkSeller

Manager

EmployeeService

Get EmployeeService

Manager

Deck Hand

Investor

Investor

ShipBuilder

Buy Ship

Figure 4: First Step in View Integration

32

Sell Silk

CashReceipt

Manager

Customer

Ship

Manager

Silk

Cash

Get Silk

CashDisbursement

Manager

SilkSeller

Manager

EmployeeService

Get EmployeeService

Manager

Deck Hand

Investor

Investor

ShipBuilder

Buy Ship

Sail ShipUse ES

S

Figure 5: Completed Economic Event-level Diagram for the Merchant of Venice

33

34

Silk

Cash

Sale

Cash Receipt

Manager

Customer

Manager

Silk

Cash CashReceipt

Take Customer

Order

Call onCustomer

Customer

Salesperson

Customer

Manager

Deliver Order

Manager

Figure 6: Relationship Between Economic Event and Business Event REA Diagrams

Business Event REAEconomic Event REA

35

Deliver Silk

CashReceipt

Manager

Customer

Ship

Manager

Silk

Cash

Get Silk

CashDisbursement

Manager

SilkSeller

Manager

EmployeeService

Get EmployeeService

Manager

Deck Hand

Investor

Investor

ShipBuilder

Buy Ship

Sail Ship

Take Order

Call on Cust

Customer

Salesperson

Use ES

Figure 7: Business Event-level Diagram for the Merchant of Venice

36

Table 1

Key Characteristics to Differentiate

Traditional and REA Accounting Information Systems

1. Support all critical events.

2. Store a detailed history of events.

3. Store the data in an integrated data repository.

4. Have the ability to retrieve and manipulate the data to meet users needs.

5. Process the events as they occur.

6. Directed REA design and implementation.

7. Prepare the financial statements without journal entries and a general ledger.

Source: David 1995

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Table 2

Overview of the REA Design Methodology

I. Economic event-level analysis

Identify economic exchanges.

A. Develop individual E-R diagrams for each exchange following the REA template. Be sure to include all resources, even those which are not tracked in traditional accounting systems.

B. Perform view integration of the exchanges:

1. “Overlay” duplicate entities.

2. Several entities (rectangles) can be drawn to represent the same resource, event, or agent if it makes the diagram more manageable.

3. Analyze each Event to ensure that the duality relationships between the “gives” and “takes” are maintained.

4. Analyze each Resource to identify, at a minimum, both an increase and a decrease.

II. Evaluate each economic event to determine if there are required business events.

A. Be very critical before adding any business events.

B. Do NOT include any information events. Instead, identify attributes about the resources, events, and agents necessary to produce the information. Create the database with these attributes, and identify the most effective method of capturing that data so it will be available in the future.

III. Supplement the economic events in the diagram with the business events.

IV. Create a system to store the data.

V. Capture the data about transactions as they occur so the data mirrors the activities in the business.

VI. Provide users with access to the data.

A. Create on-line inquiry screens for answers to standard, repetitive questions.

B. Provide a query generation tool for non-standard question answers.

C. Create reports only if necessary.

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Table 3 Reengineering Examples from Hammer and Champy 1993

and Economic Exchanges Affected

Company Process Reengineered Economic ExchangeIBM Credit application for

computer purchasersGive Money (Loan)- Get Money (Payments)

Hallmark Product development Use Resources - Make Cards

Sales Analysis Sell Cards - Get Money

Taco Bell Eliminate production activities and dining facilities

Use Resources - Make Tacos, andSell Tacos - Get Money (key

focus for customer value)

Capital Holding Customer service and selling insurance

Sell Insurance - Get Money

Human Resources - performance appraisal

Get Employee Service - Give Money

Bell Atlantic Sell Carrier Access Sell Access - Get Cash

39

REA (Resources, Events and Agents)

Documents

arizona state

systems development

driven business

integrated

place purchase

individual

generic rea

traditional