An REA Model of an
Economic Exchange
William E. McCarthy*
Michigan State University
(These slides may be copied as long as original source is cited)
*http://www.msu.edu/user/mccarth4/
Cookie-Monster (the customer) and Elmo (the
entrepreneur) meet in the (real or virtual)
marketplace, thus setting the stage for an
Economic Exchange
Economic
Resource
Economic
Event
Economic
Agent
duality
Source:
W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting
Systems in a Shared Data Environment,” The Accounting Review, July 1982, pp 554-78.
W.E. McCarthy “The REA Modeling Approach to Teaching Accounting Information Systems,”
Issues in Accounting Education, November 2003, pp. 427-41. (source of following slides)
Cookie-Monster (the customer) and
Elmo (the entrepreneur) engage in a
SHIPMENT (transfer of Cookie Inventory)
Economic Resource
inside
participation
Economic Agent
Economic Event
stock-flow
Economic Agent
outside
participation
Give
Take
duality
outside
participation
Economic Agent
Economic Event
stock-flow
Economic Resource
inside
participation
Economic Agent
REA model of cookie sale from
entrepreneur’s (ELMO) perspective
Cookie-Monster (the customer) and
Elmo (the entrepreneur) engage in a
PAYMENT (transfer of Cash)
Economic Resource
inside
participation
Economic Agent
Economic Event
stock-flow
Economic Agent
outside
participation
Give
Take
duality
outside
participation
Economic Agent
Economic Event
stock-flow
Economic Resource
inside
participation
Economic Agent
REA model of cookie sale from
entrepreneur’s (ELMO) perspective
Economic Resource
Cookies
inside
participation
Economic Agent
Salesperson
Economic Event
stock-flow
Sale
outside
participation
Give
Take
Economic Resource
Cash
Customer
duality
outside
participation
Economic Event
stock-flow
Economic Agent
Economic Agent
Customer
Cash Receipt
inside
participation
Economic Agent
Cashier
more general exchange model from the
entrepreneur’s (ELMO’s) internal perspective
COOKIES
COOKIES-stockflow-SALE
Product#
Description
Price
QOH
P-1
Chocolate
Chip
1.05
200
P-2
Chocolate
.95
P-3
Peanut
Butter
1.00
Pecan
1.10
P-4
Product#
Invoice#
Quantity
P-2
I-1
5
P-3
I-1
10
205
P-3
I-2
20
97
P-4
I-3
9
P-1
I-4
4
P-3
I-4
5
257
SALE-dualityCASH_RECEIPT
SALE
Invoice#
Dollar
Amount
Date
Salesperson
Employee#
Customer
#
Invoice
#
Receipt
Timestamp
Amount
Applied
I-1
14.75
1JUL
E-1234
C-987
I-1
2JUL0830
14.75
I-2
20.00
2JUL
E-1235
C-888
I-2
3JUL0800
2.00
I-3
9.90
3JUL
E-1236
C-999
I-2
5JUL0800
18.00
I-4
9.20
5JUL
E-1237
C-999
I-3
8JUL1145
9.90
I-4
8JUL1145
9.20
Partial Database for
Elmo’s Cookie Business
Why is this invoice amount $14.75 ??
How is customer paying for this ???
A business process is a set of activities that takes one or more
kinds of input and creates an output that is of greater value to the
customer (Hammer and Champy)
business process
business process
business process
labor
cash
Acquisition
Cycle
cookie
ingredients
cash
Conversion
Cycle
cookies
Revenue
Cycle
value chain
A value chain is a purposeful network of business processes
aimed at assembling the individual components of a final product
(i.e., its portfolio of attributes) of value to the customer (Porter
and Geerts/McCarthy)
Part of ELMO’s Value Chain for Providing Cookies
Semantic infrastructure of system
matches extended REA pattern
Enterprise
Systems
No Organizing
Rationale
Single Entry
Inwardly Oranized
A = L + OE
Outwardly
Organized
Enterprise
Value Chain
Hybrid
Single
Source
ERP
Transactions
& Obligations
Bookkeeping
MS Money
Quicken
Multidimensional
Accounting
Platinum
Solomon
Peachtree
Quickbooks
Modular
Integration:
ABC, MRP
Independent
Best of
Breed ERP
IntegratorEnabled
ERP
PeopleSoft
SAP
BPCS
Great Plains Dynamics
Trading
Partner
Constellar Hub
Vitria
StandardsEnabled
Supply
Chain
OMG
OAG
Customer
Focused
Siebel
Goldmine
i2
Ariba
ebXML
ISO Open -EDI
Enterprise Systems classification structure is from David, McCarthy & Sommer, Communications of the ACM, May 2003, pp. 65-9.
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 Openedi) 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.
Illustration of Perspective: Trading Partner vs. Independent
Enterprise
Independent view of
Inter-enterprise events
Business
Process
Enterprise
Business
Process
Business
Process
Business
Process
Business
Process
Used for
collaboration space
modeling
Enterprise
Business
Process
Trading Partner view of
Inter-enterprise events
(upstream vendors and
downstream customers)
Business
Process
Blue arrows represent flow of goods, services,
and cash between different companies; green
arrows represent flows within companies
Business
Process
Business
Process
SOURCE: Adapted from ISO 15944-4, K. Morita
Economic Resource
Economic Agent
from
Economic Event
stock-flow
Economic Agent
to
initiating transfer
duality
responding transfer
Economic Agent
to
Economic Event
stock-flow
Economic Agent
from
Economic Resource
REA model of cookie sale from independent
(collaboration space) perspective
Ontological Extensions to the REA
Model (Geerts and McCarthy)
• Type images for basic objects allows specification of
policies and controls plus abstract specification of
negotiation components
• Commitment images for economic events allows
specification of contracts and agreements
• State machine model allows specification and
ordering of business events as collaboration space
messaging and/or internal workflow
• Aggregation of binary collaborations allows
mediated collaboration with third parties
SOURCE: Geerts and McCarthy, The Ontological Foundations of REA Enterprise Information Systems, 2003.
Economic
Resource
Type
Economic
Contract
governs
Agreement
typifies
establish
specifies
involves
specifies
reciprocal
Economic
Commitment
specifies
reserves
Economic
Event
Type
qualifies
fulfills
typifies
Economic
Resource
stockflow
Business
Role
Economic
Event
from
to
Regulator
Economic
Agent
constrains
duality
Partner
Business
Transaction
Third
Party
requires
Bilateral
Collaboration
participates
Mediated
Collaboration
ISO Open-edi Ontology Collaboration Model
SOURCE: Adapted from ISO 15944-4, W.E. McCarthy
Cookie-Monster and Elmo after their
economic exchange (both economic agents
have now reached higher levels of utility)
Cookie Monster and Elmo are of course
characters from the Public Broadcasting Service
TV show Sesame Street*. Their use here is
only illustrative. Cookie Monster is a great
example of a typical buyer (has money, wants
goods) because he is most happy when he has
a cookie to eat. The use of Elmo as a typical
seller (has goods, wants money) is only a
convenient illustration. The Cookie Monster
shown was a favorite toy of my daughter
Meghan. The Elmo was bought for me by my
wife Jane.
* see http://www.sesameworkshop.org