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Economic Exchange – Two related economic events where we acquire one resource in exchange for another
Economic exchanges are important because they involve the most fundamental events where value is added in the business. Therefore, the first part of this course will focus on these events only.
Examples: give cash, get inventory; give inventory, get cash; get cash from investor, give dividend to investor; borrow money from bank, give money to bank; give cash, get building; give cash, get services

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Two related events
Each event is associated with a resource – one event increases resources (get), the other decreases or uses resources (give); get and give may, and usually do, involve different resources
Each event usually involves one internal agent and one external agent; in an exchange, generally the same external agent is associated with both events
Goal is to understand what the events, resources and agents are, and the nature of the relationships between them

REA
(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 duality
Economic
Agent
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
Economic Agent inside participation
Economic Event stock-flow
Economic Agent outside participation
Give
Take stock-flow duality outside participation
Economic Agent
Economic Resource
Economic Event
Economic Agent inside participation
REA model of cookie sale from entrepreneur’s (
ELMO ) perspective

Economic Resource stock-flow
Give
Take stock-flow
Economic Resource
Economic Agent inside participation
Economic Event
Economic Agent outside participation duality
Economic Agent outside participation
Economic Event
Economic Agent inside participation
REA model of cookie sale from entrepreneur’s (
ELMO ) perspective

Economic Resource
Cookies stock-flow
Give
Take stock-flow
Economic Resource
Cash inside participation
Economic Agent
Salesperson
Economic Event
Sale outside participation
Economic Agent
Customer duality outside participation
Economic Agent
Customer
Economic Event
Cash Receipt inside participation
Economic Agent
Cashier more general exchange model from the entrepreneur’s ( ELMO’s
) internal perspective

COOKIES
Product# Description Price QOH
P-1 1.05
200
P-2
P-3
P-4
Chocolate
Chip
Chocolate
Peanut
Butter
Pecan
.95
1.00
1.10
205
97
257
COOKIES-stockflow-SALE
Product# Invoice#
Quantity
P-2
P-3
P-3
P-4
P-1
P-3
I-1
I-1
I-2
I-3
I-4
I-4
5
10
20
9
4
5
SALE
Invoice# Dollar
Amount
I-1
I-2
I-3
14.75
1JUL
20.00
2JUL
9.90
Date Salesperson
Employee#
3JUL
E-1234
E-1235
E-1236
I-4 9.20
5JUL E-1237
Partial Database for
Elmo’s
Cookie Business
Customer
#
C-987
C-888
C-999
C-999
SALE-duality-
CASH_RECEIPT
Invoice
#
Receipt
Timestamp
I-1 2JUL0830
I-2
I-2
I-3
I-4
3JUL0800
5JUL0800
8JUL1145
8JUL1145
Amount
Applied
14.75
2.00
18.00
9.90
9.20
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 cash business process labor
Acquisition
Cycle cookie ingredients
Conversion
Cycle cookies business process
Revenue
Cycle cash 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

Enterprise
Systems
Semantic infrastructure of system matches extended REA pattern
No Organizing
Rationale Inwardly Oranized
Outwardly
Organized
Single Entry
A = L + OE Hybrid
Single
Source
ERP
Enterprise
Value Chain
Best of
Breed ERP
Trading
Partner
Independent
Transactions
& Obligations
MS Money
Quicken
Bookkeeping
Peachtree
Quickbooks
Multidimensional
Accounting
Platinum
Solomon
Modular
Integration:
ABC, MRP
ERP
Integrator-
Enabled
PeopleSoft
SAP
BPCS
Great Plains Dynamics
Constellar Hub
Vitria
Standards-
Enabled
OMG
OAG
Supply
Chain i2
Ariba
Customer
Focused
Siebel
Goldmine 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)
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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
Business
Process
Enterprise
Business
Process
Used for collaboration space modeling
Business
Process
Business
Process
Enterprise
Business
Process
Trading Partner view of
Inter-enterprise events
(upstream vendors and downstream customers)
Business
Process
Business
Process
Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies
Business
Process
SOURCE: Adapted from ISO 15944-4, K. Morita

Economic Resource
Economic Agent from
Economic Event stock-flow
Economic Agent to initiating transfer responding transfer duality
Economic Event stock-flow to
Economic Agent
Economic Agent
Economic Resource from
REA model of cookie sale from independent
(collaboration space) perspective

The Merchant of Venice 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 negotiates with silk sellers and purchases silk. When the return trip is completed, the
Merchant of Venice pays the deck hand, and sells the silk. After retaining a portion of the proceeds for himself, the remaining proceeds from the venture are distributed among the investors according to the amount of their original investment.

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Get cash from investor, give cash (principal plus return) to investor
Give cash to silk merchant, get silk from merchant
Give silk to wealthy people, get cash from wealthy people
Give cash to ship builder, get ship from ship builder
Give cash to deck hands, get service from deck hands
Give cash to merchant, get services from merchant

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REA/Business Process – Show the events, resources and agents in a business process and relationships between them
Data Model –Show the key entities to store data about (tables) and relationships between them which must be captured
(primary/foreign key relationships and M:M tables)
Entity: events, resources or agents
Describes the Relationship between entities
ER DIAGRAMS ARE NOT FLOWCHARTS!!!!!!

Resource get
Increasing
Event by
Internal
Agent for from to
External
Agent
Resource give
Decreasing
Event by
Internal
Agent

Inventory give
Goods
Delivery by
Shipping
Clerk for to from
Customer
Cash get
Cash
Receipt by
Cash Rects
Clerk

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Generally, ERD’s are drawn with the events listed from top to bottom in the order they take place
 For revenue, the two events making up the exchange may occur
 At the same time (a cash sale)
 With the delivery first (a sale on account)
 With the cash receipt first (customer prepays or makes a deposit)

Inventory get
Goods
Receipt by
Receiving
Clerk for from to
Vendor
Cash give
Cash
Payment by
Cash Pmts.
Clerk

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Step 1: Identify Events -- Store information about events we want to plan, execute or evaluate; list these down the center of the ER
Step 2: Identify Resources Influenced by Events -
- Resources are often assets of the business that we wish to track information about; List these to the left of the events on the ER.
Step 3: Identify Agents Involved in Events --
Usually one internal agent and one external agent. List these to the right of the events on the
ER.

 Step 4: Identify Attributes of Events, Resources and Agents -- Selection of attributes determines what information we later have to make reports, etc.
 Step 5: Identify Relationships between Events,
Resources and Agents -- Words in the box are unimportant, but you may want to use the basic terminology used in the templates

 Eventually, we will become much more exacting about the attributes stored when we create database tables. For now, attributes help to understand what is being modeled
 For events, think of all of the things that would be on the paper document used to capture information about the event
 For resources and agents, this is their master file information

Inventory give
Goods
Delivery by
Shipping
Clerk for to from
Customer
Cash get
Cash
Receipt by
Cash Rects
Clerk

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Goods Delivery – Date, Dock shipped from, customer, items shipped, qty.
Cash Receipts – Date, Place received, customer, amount received
Inventory – Item Number, description, qty on hand
Cash – Account/Drawer Number, Bank/Location,
Description, Balance
Customer – Customer Number, Name, Address,
Contact, Credit Limit, Balance
Shipping Clerks, Cash Receipts Clerks – Employee
Number, Name, Address, Department

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Inventory items can be either
 generic inventory items – ones that we always keep in stock where we keep a catalog of the items we sell;
The data table for generic inventory items is basically a listing of the items in our catalog and QOH
 unique inventory items – custom made items that will each have a unique identifier (think job order costing).
The data table for unique inventory items is a listing of all of the individual items (or groups of identical items called jobs) produced
YOU SHOULD ALWAYS ASSUME GENERIC
INVENTORY ITEMS, UNLESS IT IS
SPECIFICALLY STATED OTHERWISE

 The cash resource represents cash on hand or in the bank. The data table storing information about cash looks like one of the following
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For cash on hand – A listing of all of the cash drawers in all of our stores and the amount of cash that should be in each one
For cash in the bank – A listing of all of our bank accounts, the bank and the balance

Inventory get
Goods
Receipt by
Receiving
Clerk for from to
Vendor
Cash give
Cash
Payment by
Cash Pmts.
Clerk

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Goods Receipt – Date, Dock where received, vendor, items received, qty.
Cash Payments – Date, Cash Account Number, Vendor, amount paid
Inventory – Item Number, description, qty on hand
Cash – Account/Drawer Number, Bank/Location,
Description, Balance
Vendor – Vendor Number, Name, Address, Contact,
Credit Limit, Balance
Receiving Clerks, Cash Payments Clerks – Employee
Number, name, Address, Department

Employee
Service get
Get Employee
Service
Time Ticket by
Production
Supervisor for from to
Employee
Cash give
Cash
Payment by
Payroll
Clerk

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Step 6: Cardinality and Optionality -- For each entity pair there are really TWO DIFFERENT relationships
Focus on a single example of one of the two entities
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Cardinality -- How many instances the entity on the other side of the relationship can be associated with that single entity?
Optionality -- At ANY possible point in time, does a relationship have to exist between the entity and the one on the other side, or is it simply possible for a relationship to exist?
Reevaluate, starting with a single example of the other entity in the relationship

Cash
Payment sent to
Vendor
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Single Payment
How many vendors associated with single payment?
 Only one (no crows feet)
Does payment always have to have a vendor?
 Yes (vertical line)
 Notice where this symbol goes

Cash
Payment sent to
Vendor
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Single Vendor
How many payments associated with single Vendor?
 Can be many (crows feet)
Does Vendor always have to have a payment?
 No – goods received, no payments yet (circle)
 Notice where this symbol goes

Finished
Goods
Inventory get
Manufacture Goods
(Production Order) by
Production
Supervisor for for for
Raw Materials
Inventory give
Issue RM
(Materials
Requisition) by from
Production
Supervisor
Storeroom
Clerk
Machine
Time give
Use Machines
(machine Log) by from
Production
Supervisor
Machine
Operator
Employee
Service give
Use Employee
Service
(Time Ticket) by
Production
Supervisor from Employee

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Manufacture Goods/Production Order – Date, factory number, supervisor, item to produce, qty.
Use Raw Materials/Materials Requisition -- Date, Storeroom
Clerk, Production Employee, Items Issues, Production Order,
Qty Issued
Use Employee Service/Time Ticket – Date Employee,
Production Order, Hours Worked, Job Code
Use Machine Time/Machine Log – Date, Machine Operator,
Machine, Hours used, Production Order
Employee Service – Job Code, Description, Capacity
Machine Time – Machine Number, Machine Use, Capacity
FG/RM Inventory – Item Number, description, qty on hand
Production Supervisor, Storeroom Clerk, Employees, Machine
Operators – Employee Number, name, Address, Department,
YTD earnings

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There is NO CASH INVOLVED, but Economic Exchange
Still Exists – Get Finished Goods, Give up employee service, machine time, raw materials
The Economic Exchange is within the organization
Because all events are internal, there may not be two agents for each event; Most often, the ones deleted would be the production supervisor (authorizer) in the
‘use machine time’ and ‘use employee service’ events
Often, all of these events are recorded using a single document (i.e. a record of a good being assembled; called a job cost sheet); the process illustrated here would be used in a large manufacturing operation
The Manufacture Goods event can take place over a course of time (several hours, days or weeks). We may record sub-events – i.e. start production, complete production

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Definition – When a single resource is received or created at the same time it is used or delivered.
Simultaneous production and consumption takes place with all services.
Unlike goods where there is one event where we get the good (goods receipt) and a separate one where we give it (shipment), for services, give and get occur simultaneously because services cannot be stored
Because of simultaneous production and consumption, the Give
Employee Service pattern for conversion is the same as the Get
Employee service template shown for payroll, except it says “GIVE” rather than “GET”
These are really the same event because we simultaneously get
(produce) and give (consume) the employee’s service.
Despite the fact that they are the same event, sometimes, the event is recorded two different times, once to pay payroll (the get) and separately to track it for job costing purposes (the give); A better design is to record the event only once, on the time ticket, and use the data for both payroll and job costing (as we will assume)

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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

Economic
Resource
Type
Economic
Contract
Agreement typifies
Economic
Resource establish specifies reciprocal reserves specifies involves
Economic
Commitment fulfills specifies
Economic
Event
Type typifies stockflow Economic
Event from to
Economic
Agent duality
Business
Role governs qualifies
Regulator constrains
Business
Transaction
Bilateral
Collaboration
Partner requires participates
Third
Party
Mediated
Collaboration
ISO Open-edi Ontology Collaboration Model
SOURCE: Adapted from ISO 15944-4, W.E. McCarthy