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Accounting Information Systems,
6th
editionJames A. Hall
COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license
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 Orientation
When 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 Model
REA 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 databases
Events fall into two groups: Economic – increases or decreases resourcesSupport – control, planning, and other management activities; but do not directly affect resources
Agents in the REA Model
Agents 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 Diagram
View 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 model
Include 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 1Each 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 entities
Represented 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
Increases Receive Cash Cash ReceiptsClerk
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 Associations
Many-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 Models
Merging 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 linkedAttribute – 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 sideif 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 tablesEvent 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.
RevenueCosts
Firm InfrastructureHuman resource management
Technology developmentProcurement
Inbound Logistics Operations Output
LogisticsMarketing
& Sales Service
Supp
ort A
ctiv
ities
Primary Activities
Margin
Competitive Advantages of the REA Model
Using REA can lead to more efficient operations.Helps managers identify non-value added activities that can be eliminated
Increasing productivity via elimination of non-value added activities generates excess capacity
Storing 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 decisions
supporting 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