The REA Approach To Business Process Modeling: Accounting Information Systems, 5
The REA Approach To Business Process Modeling: Accounting Information Systems, 5
The REA Approach To Business Process Modeling: Accounting Information Systems, 5
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Objectives for Chapter 10
• Limitations of traditional database systems
• Benefits of an REA approach to information systems
• Implications of REA for the accounting
• Steps in preparing an REA model of a business
process
• Importance of identifying the attributes of entity
relations in relational database design
• Differences between REA model representations and
ER diagram representations
Traditional Approaches:
User-View Orientation
• When data-modeling and IS design is too
oriented toward the user’s views, problems
arise:
– multiple information systems
– duplication of data
– restricted user-view leads to poor decision-
making
– inability to support change
Traditional Approaches:
Financial Accounting Orientation
• Dominance of traditional accounting as the primary
information provider leads to problems:
– single view of business entity using the
accounting/balance sheet model:
Assets
Assets == Liabilities
Liabilities ++ Owners’
Owners’ Equity
Equity
– double-entry, debits and credits
– high level of aggregation
– ignoring non-financial data
– inability to serve diverse enterprise-wide needs
Resources, Events, and Agents
Model
• Developed in the ‘70's by Dr. McCarthy (Michigan State)
• The definition of events is broad enough to encompass both
operational and accounting transactions.
– Expands the scope and usefulness of AIS by making it capable of
providing both financial and nonfinancial information.
• Data for each event is stored in disaggregated form.
– Outputs are subsequently produced by assembling the required data
from the various records.
• Many firms have not adopted the REA model since it is a
major change from the traditional double-entry approach.
– The REA or events perspective is increasingly seen as necessary to
meet changing information needs.
Resources, Events, and Agents
Model
• An approach to database design meant to overcome problems with
traditional approaches:
– formalized data modeling and design of IS
– use of centralized database
– use of relational database structure
– collects detailed financial and non-financial data
– supports accounting and non-accounting analysis
– supports multiple user views
– supports enterprise-wide planning
Resources, Events, and Agents
Model
• The REA model is an alternative accounting
framework for modeling an organization’s
– economic resources
– economic events
– economic agents, and
– their interrelationships
• A variation of entity-relationship diagramming
(ERD) is used to model these relationships.
Resources in the REA Model
• Economic resources are the assets of the
company.
– able to generate revenue
– objects that are scarce and under the control of the
organization
– can be tangible or intangible
• Does not include some traditional accounting
assets:
– for example, Accounts Receivables
– artifacts that can be generated from other primary data
Events in the REA Model
• Economic events are phenomena that effect
changes in resources.
– a source of detailed data in the REA approach to
databases
• Three classes of events:
– operating events--what happens
– information events--what is recorded
– decision/management events--what is done as a
result
• Only operating events are included in the REA
model.
Agents in the REA Model
• Can be individuals or departments
• Can participate in events
• Can affect resources
– have discretionary power to use or dispose of
resources
• Can be inside or outside the organization
– clerks
– production workers
– customers
– suppliers, vendors
– departments, teams
Resources, Events, and Agents
Model
• A variation of the entity-relationship
diagramming (ERD) is used in REA modeling.
• Basic ERD symbols:
Firm Infrastructure
Human resource management
Technology development
Margin
Procurement
Primary Activities
Database Applications
Phase 1 Phase 2 Phase 3
Flat Files Event-Driven REA-Model
Database Database
Receive
Payment
User-View #1 User-View #2
Sales Report
Past Due Accounts
Name Amount
James $500.00 REA Database
Henry $100.00
… …
REA Model v. ERD
• The two methods have a lot in common, but there
are differences:
– ERDs are more commonly found with traditional event-
based systems.
– REA-modeling is used with event-oriented systems.
– ERDs often use diamonds to show events, while REA
model always classifies events as a type of entity.
– REA includes only operating events, while ERDs can
capture all three types of event.
– REA facilitates placement of internal controls.
– REA is more focused on business needs and, as a
result, often simpler.
ERD of Manufacturing
REA Model of Manufacturing, 1
REA Model of Manufacturing, 2