Course Year

: M0034 - Information and Business Process : 2012

The REA Approach to Database Modeling

Sessions 07 08

Learning Outcomes
Describe the model of business process Integrate the whole model of business process

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Bina Nusantara

Details of the Material

The REA Approach Developing an REA Model View Integration: Creating an Enterprise-Wide REA Model

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Bina Nusantara

Accounting Information Systems, 6th edition James 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 10

Economic foundations of the REA model Key differences between traditional ER modeling

and REA modeling The structure of an REA diagram Create an REA diagram by applying the view modeling steps to a business case Create 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 users views, problems arise:

multiple information systems
duplication of data restricted user-view leads to poor decision-

making inability to support change

Resources, Events, and Agents Model

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 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

REA models consists of three

entity types and the associations linking them.

Resources Events Agents

Resources in the REA Model

Resources the assets of the company
things of economic value
objects of economic exchanges 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:

artifacts that can be generated from other primary data for example, accounts receivables

Events in the REA Model

Events 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 resources Support 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 events 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

Elemental REA Model

Participates

External Economic Agent

Economic Resource

Stock Flow

Economic Event

Duality

Participates

Internal Economic Agent

Resources, Events, and Agents Model

Another key feature of the REA

model is economic duality.

Events occur in pairs

Represent the give event and receive

event of an economic exchange

REA Model showing Duality of a Give and Receive Exchange

External Agent

Participates
Resource A

Out Flow

Give Economic Event

Participates
Give Activity

Internal Agent

Duality
Receive Activity

Participates
Resource B

Internal Agent

Inflow

Receive Economic Event

Participates

External Agent

ER Diagrams (ERDs) versus REA Diagrams (READs)

Classes of entities
ERDs one class

READs three classes (resources, events, and agents)

Arrangement of entities
ERDs determined by cardinality and readability READs organized into constellations by class

Sequencing of events
ERDs static READs chronological sequence of business processes

Naming conventions ERDs all nouns READs nouns (Rs and As) and verbs (Es)

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:

identify the event entities to be modeled 2. identify the resource entities changed by events 3. identify the agent entities participating in events 4. determine associations and cardinalities between entities
1.

Step 1: Identify the Event Entities

Identify the events that are to be included

in the model
Include at least two economic events (duality) May include support events

Arrange events in chronological sequence

Focus on value chain events Do not such invalid events such as:
bookkeeping tasks accounting artifacts, e.g., accounts receivable

Arrangement of Events Entities in Order of Occurrence

Events
Order of Events
Verify Availability

Take Order

Ship Product

Receive Cash

Step 2. Identify the Resource Entities

Identify the resources impacted by events

identified in step 1 Each event must be linked to at least one resource.

Economic events directly affect resources Support 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.

Resources

Events

Agents
Customer Services Clerk

Inventory

Verify Availability Customer

Customer Inventory Take Order Sales Representative

Shipping Clerk Inventory Ship Product Customer

Customer
Cash Receive Cash Cash Receipts Clerk

REA Model showing Events and Related Resources and 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.

Associations and Cardinality in REA Diagram

Review Items Available

Respond to Customer

Customer Services Clerk

Verify Availability

Request Related to Places Order

Customer

Process Order

Inventory

Reserves

Take Order

Sales Representative

Causes

Ships

Shipping Clerk

Reduces

Ship Product
Receives

Duality

Customer
Remits

Increases

Cash

Receive Cash
Processes Remittance

Cash Receipts Clerk

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.

Link Tables in REA Diagram

Inventory-Verify Link

Verify Availability

Customer
Places Order

Process Order

Inventory

InventoryOrder Link

Take Order

Sales Representative

Causes

Ships

Shipping Clerk

Inventory-Ship Link

Ship Product
Receives

Customer

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:
consolidate the individual models 2. define primary keys, foreign keys, and attributes 3. construct physical database and produce user views
1.

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.

Purchasing Clerk (Employee) Order Product

Cust Ser Clerk

(Employee)

Verify Availability
Supplier Request

Customer
Receiving Clerk (Employee) Receive Product

Supplier

Sales Rep Inventory Take Order

(Employee)

Shipping Clerk
Cash Disb Clerk (Employee)
Disburse Cash

(Employee)

Ship Product
Payroll Clerk (Employee)

Customer

Worker (Employee)

Cash

Receive Cash

Cash Rec Clerk

(Employee)

Supervisor (Employee)

Get Time

Integrated REA Diagram

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 linked Attribute a characteristic of the entity to be recorded in the table

Rules for Foreign Keys

Primary 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 tables primary key may be the foreign key if 1 to many (1:m) association, the primary key on one of the sides is embedded as the foreign key on the other side if many to many (m:m) association, create a separate linking table with a composite primary key

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

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 tables

Event 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 Accounts Name Amount James $500.00 Henry $100.00

User-View #2
Sales Report

REA Database

Value Chain Analysis

Competitive 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.

Porters Value Chain

Revenue Costs Firm Infrastructure Human resource management Technology development Procurement Inbound Operations Logistics Output Logistics Marketing & Sales Service

Primary Activities

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.

Competitive Advantages of the REA Model

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

Continued to session 09
Thank you

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Bina Nusantara