Chapter 10
The REA
Approach to
Business
Process
Modeling
Objectives for Chapter 10
• Limitations of traditional database system
• Benefits of adopting an REA approach to
information systems compared to a traditional
approach
• Implications of REA for the accounting
profession
• Steps involved in preparing an REA model of a
business process
• Importance of identifying the attributes of entity
relations in relational database design
• Differences between an REA model
representation of a business process and an ER
diagram representation
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 decisionmaking
– inability to support change
Traditional Approaches:
Financial Accounting Orientation
• Dominance of accounting as the primary
information provider leads to problems:
– single view of business entity using the
accounting model:
Assets = Liabilities + Owners’ 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
• 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
– interrelationships
• A variation of the Entity-Relationship diagramming
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
– these are 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
• Developed in the ‘70's by Dr. McCarthy (Michigan State
University) from ER diagramming for accounting.
• 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
represents a major change from the traditional double-entry
approach.
– The REA-events perspective will be increasingly seen as necessary
to meet changing information needs in this information age.
Resources, Events, and
Agents Model
• A variation of the Entity-Relationship diagramming
is used in REA modeling.
ER-Diagram Symbols
Resources, Events, and
Agents Model
• A variation of the Entity-Relationship diagramming
is used in REA modeling.
ER-Diagram Symbols
entity
relationship
attribute
(optional)
(optional)
Advantages of the REA Model
• More efficient operations
– It helps managers identify non-value added activities that
can be eliminated.
– Storage of both financial and nonfinancial data in the same
central database reduces the need for multiple data.
collection, data storage, and maintenance procedures
– Storing financial and nonfinancial data about business
events in detailed form permits the support of a wider range
of management decisions.
• Increased productivity via elimination of non-value added
activities that will generate excess capacity
• Competitive advantage by providing more relevant, timely,
and accurate information
Value Chain Analysis
• The competitive advantage benefits of
adopting the REA approach are most clearly
seen from the perspective of the value chain.
– 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.
Porter’s Value Chain
Revenue
Costs
Firm Infrastructure
Human resource management
Technology development
Procurement
Inbound
Operations
Logistics
Output
Logistics
Primary Activities
Marketing
& Sales
Service
Database Applications
Phase 1
Flat Files
Limitations:
Redundant
data;
Anomalies
Phase 2
Event-Driven
Database
Limitations:
Loss of noneconomic
information
Phase 3
REA-Model
Database
Limitations:
Not widely used;
Requires detailed
analysis
Database Sales Order Entry/Cash Receipts System
Database Purchases/Cash Disbursement System
Limitations of TransactionBased Systems
• Event: a single business activity within a
business process which involves resources and
agents
• Traditional event-based database systems tend to
focus exclusively on economic events.
– loss of non-economic/non-financial information
• REA is event-oriented v. event-based.
– i.e., includes non-economic and economic
event information
Developing an REA Model:
Overview
• Before developing the REA model, identify
events and classify as:
Operating events--activities that produce goods
and services
Information events--activities associated with
recording, maintaining, and reporting
information
Decision/Management events--activities that
lead to decisions being taken
• REA model uses only operating events.
REA Example:
Horizon Books
Horizon Books is a bookstore in downtown Philadelphia. It
carries an inventory of approximately 5,000 books.
Customers come in and browse the shelves, select their
books, and take them to one of three cashiers positioned
in different parts of the store. One of the cashiers is
situated at an information desk where customers can
discover whether a particular book is in stock, place orders
for books not currently available in the bookstore, and
collect and pay for books previously ordered. The cashier
at the information desk has a book database that is
consulted for every query. There are no credit sales. All
customers pay for their purchases at the time of purchase.
Developing an REA Model:
Step 1
• Identify the operating events that are
to be included in the model.
• These are the events that support the
strategic objectives of the
organization and about which we
need to gather information.
REA Example:
Horizon Books
Answer
Query
Make
Sale
Receive
Payment
Step 1: Identify operating events in Horizon Books’ sales model.
Developing an REA Model:
Step 2
• The operating events identified now
need to be organized in sequence of
occurrence.
• Notice how each event is shown as verbobject.
– This facilitates arranging them in order of
occurrence.
• Note also that the verb is represented
from the perspective of the organization,
not the customer.
REA Example:
Horizon Books
Step 2: Place Horizon Books’ operating events in sequence.
Developing an REA Model:
Step 3
• Identify the resources and agents
involved in each operating event.
• This is most easily done by answering
who, what, and where questions about
each event.
– Who was involved?
– What was involved?
– Where did it take place?
REA Example:
Horizon Books
Step 3: Identify resources and agents associated with events.
Developing an REA Model:
Step 4
• Identify the links between the resources,
events, and agents.
• Start from each event and connect it to
the resources and agents that are
involved in the event.
• Draw a line connecting events that are
logically related.
REA Example:
Horizon Books
Step 4: Establish Horizon Books’ sales process relationships.
Developing an REA Model:
Step 5
• Assign the record associations or
cardinalities of all the entity relationships.
• Five forms of associations (cardinalities)
are used when constructing the REA
model.
– zero-to-one (0,1)
– zero-to-many (0,M)
– one-to-one (1,1)
– one-to-many (1,M)
– many-to-many (M,M)
REA Example:
Horizon Books
Step 5: Completed REA model of Horizon Books’ sales process
with cardinalities.
Developing an REA Model:
Attributes and User-Views
• The final step is to define the attributes
associated with the entities in the REA
model.
• These are used to populate the
database.
• They are also used to create the various
physical user-views needed in daily
operations:
– reports, documents, computer interfaces
Developing an REA Model:
Attributes
Using the customer as an example, these data include:
Financial
Customer name
Customer address
Customer telephone
number
Amount owed by
customer
Value of total sales to
date
Terms of trade offered
Nonfinancial
Customer credit rating
Damaged goods
record
On-time payment
record
Customer volume
record
EDI access
Internet access
Developing an REA Model:
User-Views
User-View #1
Past Due Accounts
Name Amount
James $500.00
Henry $100.00
…
…
User-View #2
Sales Report
REA Database
REA Model v. ER-Diagram
• The two methods have a lot in common, but there
are differences:
– ER-diagramming is more commonly found with
traditional event-based systems.
– REA-modeling is used with event-oriented systems.
– ER-diagrams use diamonds to show events, while REA
model classifies events as a type of entity.
– REA includes only operating events, while ER-diagrams
can capture all three types of event.
– REA information facilitates placement of internal
controls.
– REA is simpler and more focused on business needs.
ERD Model of Manufacturing
REA Model of Manufacturing, 1
REA Model of Manufacturing, 2