Chapter 1
Business Processes, Data Modeling
and Information Systems
Learning Objectives
 Identify entities and relationships in a



business process
Identify resources, events and agents
(REA) in a business process
Evaluate and determine the cardinalities
Model a company’s business processes
using an REA diagram
Legacy versus Modern AIS
 Legacy accounting information systems

Flat files with disconnected subsystems
 Modern accounting information systems



Use database approach that emphasizes the
integration and sharing of data across major
functional areas
Designed based on a company’s business
processes
Event-driven based upon business processes
What is Data Modeling?
 The process of creating a logical
representation of the structure of a database
based on a company’s business processes
 The most important task in the development
of an effective database is to provide useful
information
Entity-Relationship Diagram
 Entity-Relationship Diagram (ERD) is a
commonly used business data modeling
technique.
 The ERD uses a graphical representation to
identify and document various entities and
the relationships between those entities.
 Three major components of an ERD are the
entity, the relationship, and the attribute.
ERD
 An entity is anything about which a company
would like to collect and store information.


Example: inventory, purchase, vendor, etc.
It is represented using a rectangle.
 A relationship is an association between entities.
 Example: one-to-one, one-to-many
 It is represented using a diamond.
 An attribute is a characteristic of an entity, such as
the inventory number and the description of each
item in the entity of “inventory.”
Resource-Event-Agent (REA)
Diagram
 REA diagram is a framework specifically
designed for building accounting information
systems in a shared data environment based on
the ERD technique.
 Components in an REA diagram:



Resources: Things that have economic value to a
company, such as cash and inventory.
Events: Various business processes conducted in a
company’s daily operations, such as sales and
purchases.
Agents: People and organizations, such as customers
and salespeople, who participate in business events.
REA Diagram
Figure 1-1
The REA Pattern*
Resource
Economic
Resource A
Events
Agents
Inside
participation
Economic
Agent I
Outside
participation
Economic
Agent II
Economic Event
Inflow
Get Resource A
Economic
duality
Economic
Resource B


Inside
participation
Economic
Agent III
Outside
participation
Economic
Agent IV
Economic Event
Outflow
Give Resource B
A general rule: each economic event should be linked to at least one economic resource and
two economic agents.
The relationship shown between the two economic events is referred to as an economic
duality relationship. The causal relationship occurs as a result of a give and a take happening.
Basic Economic Events in
Transaction Cycles
Figure 1-2
Basic Economic Events in Transaction Cycles
Revenue Cycle
Expenditure Cycle
Human Resource/
Payroll Cycle
Financing Cycle
Sale
Purchase
Labor Acquisition
Cash Receipt
Duality
Duality
Duality
Duality
Cash Receipt
Cash
Disbursement
Cash
Disbursement
Cash
Disbursement
Conversion (Production) Cycle
Finish Goods
Inventory
Duality
Duality
Duality
Labor
Operation
Machine
Operation
Material
Issurance
Transaction Cycles and REA Modeling
 The transaction cycles are combined
into an REA model to create the entire
accounting information system (see
Figure 1-3).
 This high-level conceptual model
indicates how the transaction cycles
interact with each other and with the
financial reporting system.
Overall REA Model for an AIS
Figure 1-3
Overall REA Model for an Accounting Information System*
Human Resource/
Payroll Cycle
Financing Cycle
Labor
Acquisition
Cash Receipt
Duality
Cash
Duality
Cash
Disbursement
Cash
Disbursement
Cash
Cash
Revenue Cycle
Expenditure Cycle
Data
Data
Sale
Purchase
Data
Data
Financial Reporting System
Duality
Cash Receipt
Duality
Cash
Disbursement
Data
Labor
Finished Goods
Materials
Conversion (Production) Cycle
Finish Goods
Inventory
Duality
Duality
Duality
Labor
Operation
Machine
Operation
Material
Issurance
REA: Revenue and Expenditure Cycles
Figure 1-4
Sample REA Diagrams for Revenue and Expenditure Cycles
Resource
Inventory
Events
Inflow
Agents
Inside
participation
Purchasing Agent
Outside
participation
Vendor
Outside
participation
Vendor
Inside
participation
Cashier
Inside
participation
Salesperson
Outside
participation
Customer
Outside
participation
Customer
Inside
participation
Cashier
Purchase
Purchase-Cash
Disbursement
Expenditure Cycle
Cash
Inventory
Outflow
Outflow
Cash
Disbursement
Sale
Sale-Cash
Receipt
Revenue Cycle
Cash
Inflow
Cash Receipt
Relationships between Entities
has height
Eric
owns
5"8"
Ben
Vehicle#104
teaches
John Lewis
Person
has
Height
Person
owns
Vehicle
Professor
teaches
Course
Marketing
Cardinalities
 The number of instances one entity can
be linked to one specific instance of
another entity.
 Restricts the number of participation
constraints in a relationship.
 A cardinality is denoted as (min,max)
where min is the minimum number and
max is the maximum number that can
participate in a relationship.
Person-Height Example
(1,1)
has
Person
Eric
(0,N)
Height
5'5"
5'6"
5'7"
5'8"
5'9"
6'0"
6'1"
6'2"
Emily
Michael
Tina
(1,1)
Person
has
(0,N)
Height
Professor-Course Example
(1,N)
Professor
John Lewis
teaches
(0,N)
Mary James
Alex Davis
Jennifer Bell
Professor
(1,N)
teaches
Course
Financial Accounting
Business Law
Linear Algebra
Marketing
Data Structure
Calculus
Database Management
Computer Programming
(0,N)
Course
Using REA to Model Business Processes

Three basic steps to construct an REA diagram to
depict a company’s business processes:
1)
2)
3)

Identify economic exchange events.
Identify the resources affected by each economic
event and the agents who participate in those
events.
Determine the cardinalities of each relationship.
After the business processes are modeled, the
REA diagram should be validated by the
company’s experts who are knowledgeable about
the details and the objectives of the business
processes.
Sales-Cash Receipt Relationship (E-E)
Identify economic exchange events in the cycle
Sales
Duality
Cash Receipt
Basic REA Diagram for Cherokee’s
Revenue Cycle
Identify the resources affected by each economic event and
the agents who participate in those events
Resource
Inventory
Agents
Events
Outflow
Inside
participation
Jesse
Outside
participation
Customer
Outside
participation
Customer
Inside
participation
Jesse
Sales
Duality
Cash
(Bank Account)
Inflow
Cash Receipt
Cash-Cash Receipt Relationship (R-E)
Determine the cardinalities of each relationship
Cash
(Bank Account)
(1,N)
(1,1)
Inflow
Cash Receipt
Inventory-Sales Relationship (R-E)
(0,1)
Inventory
(1,N)
Outflow
Sales
Sales-Cash Receipt Relationship
(E-E, without
accounts
receivable)
Sales
(1,1)
Duality
(1,1)
Cash Receipt
Sales-Cash Receipt Relationship
(E-E, with
accounts
receivable)
Sales
(0,1)
Duality
(1,N)
Cash Receipt
Complete REA Diagram for Cherokee’s
Revenue Cycle
(1,N)
(0,1)
Inventory
Inside
participation
Outflow
Sale
(0,N)
Jesse
(1,1)
(1,1)
(1,1)
Outside
participation
(1,N)
Customer
Duality
Outside
participation
(1,1)
(1,N)
(1,1)
Cash
(Bank Account)
Inflow
(1,N)
(1,1)
Cash
Receipt
(1,1)
Inside
participation
(0,N)
Purchase-Cash Disbursement
Relationship (E-E)
Identify economic exchange events in the cycle
Purchase
Duality
Cash
Disbursement
Basic REA Diagram for Cherokee’s
Expenditure Cycle
Identify the resources affected by each economic event and
the agents who participate in those events
Agent
Resource
Inventory
Event
Inflow
Inside
participation
Jesse
Outside
participation
Artist/Seller
Outside
participation
Artist/Seller
Inside
participation
Jesse
Purchase
Duality
Cash
(Bank Account)
Outflow
Cash
Disbursement
Cash-Cash Disbursement Relationship
(R-E)
Determine the cardinalities of each relationship
Cash
(Bank Account)
(1,N)
(1,1)
Outflow
Cash
Disbursement
Inventory-Purchase Relationship (R-E)
(1,1)
Inventory
(1,N)
Inflow
Purchase
Purchase-Cash Disbursement
Relationship
E-E, with
accounts
payable
Purchase
(0,N)
Duality
(1,N)
Cash
Disbursement
Complete REA Diagram for Cherokee’s
Expenditure Cycle
(1,1)
Inventory
(1,N)
Inside
participation
(0,N)
Outside
participation
(1,N)
Jesse
(1,1)
Purchase
Inflow
(1,1)
(0,N)
Duality
Artist/Seller
Outside
participation
(1,N)
(1,N)
(1,1)
Cash
(Bank Account)
Cash
Disbursement
Outflow
(1,N)
(1,1)
(1,1)
Inside
participation
(0,N)
Comprehensive REA Data Model for
Cherokee Art and Antique Store
Expenditure Cycle
Revenue Cycle
(0,N)
Inside
Participation
Inside
Participation
(1,1)
(1,1)
(1,N)
(1,N)
(1,1)
Inflow
Purchase
(0,1)
Inventory
(1,N)
Sale
Outflow
Outside
Participation
(1,1)
(1,1)
Outside
Participation
Duality
(1,N)
Outside
Participation
(1,1)
(1,1)
Inside
Participation
(0,N)
Jesse
(1,1)
(0,N)
Artist/Seller
(0,N)
(1,N)
Customer
Duality
Outside
Participation
(1,1)
(1,N)
(1,N)
(1,1)
Cash
Disbursement
Outflow
(1,1)
Cash
(1,N) (Bank Account)
Inflow
(1,N)
Cash Receipt
(1,1)
(1,1)
Inside
Participation
(0,N)
End of Chapter 1