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Course : M0034 - Information and Business Process

Year : 2012

The REA Approach to Database ModelingSessions 07 08

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Bina Nusantara

Describe the model of business process

Integrate the whole model of business process

Learning Outcomes

3

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Bina Nusantara

The REA Approach

Developing an REA Model

View Integration: Creating an Enterprise-Wide REA

Model

Details of the Material

4

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Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Westernare trademarks used herein under license

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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 viewmodeling steps to a business case

Create an entity-wide REA diagram by applyingthe view integration steps to a business case

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Traditional Approaches:

User-View Orientation

When data-modeling and IS design is too

oriented toward the users views, problemsarise:

multiple information systems

duplication of data

restricted user-view leads to poor decision-making

inability to support change

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REAis an approach to database design meant toovercome 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

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Resources, Events, and Agents Model

REAmodels consists of threeentity types and the associations

linking them.Resources

Events

Agents

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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 theorganization

can be tangible or intangible

Does not include some traditional accountingassets:

artifacts that can be generated from other primary data

for example, accounts receivables

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Events in the REA Model

Events are phenomena that effect changesin resources.

a source of detailed data in the REA approachto databases

Events fall into two groups:

Economic increases or decreases resources

Support control, planning, and othermanagement activities; but do not directlyaffect resources

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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

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EconomicResource

Economic Event

External EconomicAgent

Internal EconomicAgent

Stock Flow

Duality

Participates

Participates

Elemental REA Model

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Resources, Events, and Agents Model

Another key feature of the REAmodel is economic duality.

Events occur in pairs

Represent the give event and receiveevent of an economic exchange

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Resource AGive EconomicEvent

External Agent

Internal Agent

Out Flow

Duality

Inflow Receive EconomicEvent

External Agent

Internal Agent

Resource B

Participates

Give Activity

Receive Activity

Participates

Participates

Participates

REA Model showing Duality of

a Give and Receive Exchange

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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)

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View Modeling: Creating an

Individual REA DiagramView 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:

1. 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 betweenentities

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Step 1: Identify the Event Entities

Identify the events that are to be includedin 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

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Take Order

Receive Cash

Verify Availability

Ship Product

Arrangement of

Events Entities in

Order of

Occurrence

Order of Events

Events

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Step 2. Identify the Resource Entities

Identify the resources impacted by eventsidentified in step 1

Each event must be linked to at least oneresource.

Economic events directly affect resources

Support events indirectly affect them

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Step 3. Identify the Agent Entities

Each economic event entity in an REAdiagram is associated with at least two

agent entities.One internal agent

One external agent

It is possible to have only an internal agentwhen no exchange occurs, as with certaininternal manufacturing processes.

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Inventory

Take Order

Customer

SalesRepresentative

Receive Cash

Cash ReceiptsClerk

Shipping Clerk

Cash

Customer ServicesClerk

Verify Availability

Ship Product

Customer

REA Model showing Events and Related

Resources and Agents

Customer

Inventory

Inventory

Customer

Resources Events Agents

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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 thatare 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 aretracked individually or as quantity on hand.

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Inventory Take Order

Customer

SalesRepresentative

Reserves

Respond to Customer

Process Order

IncreasesReceive Cash Cash Receipts

Clerk

Shipping Clerk

Cash

Places Order

Related

to

Processes

Remittance

Customer ServicesClerk

Verify AvailabilityReview Items Available

Request

Ship Product

Causes

Customer

Reduces

Duality

Ships

Remits

Receives

Associations and

Cardinality in REA

Diagram

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Many-to-Many Associations

Many-to-many (M:M) associations cannotbe directly implemented into relational

databases.They require the creation of a new linking

table.

This process splits the M:M association intotwo 1:M associations.

The linking table requires a composite primarykey.

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Inventory Take Order

Customer

SalesRepresentative

Process Order

Shipping Clerk

Places Order

Ship Product

Causes

Customer

Ships

Receives

Inventory-Order Link

Inventory-ShipLink

Link Tables in REA Diagram

Verify AvailabilityInventory-Verify

Link

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View Integration: Creating an

Enterprise-Wide REA Model

View integration combining several individual

REA diagrams into a single enterprise-widemodel

The three steps involved in view integration are:

1. consolidate the individual models

2. define primary keys, foreign keys, and attributes

3. construct physical database and produce userviews

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Step 1. Consolidate the Individual

Models

Merging multiple REA models requires firsta thorough understanding of the businessprocesses and entities involved in themodels.

Individual models are consolidated orlinked together based on shared entities. For example, procurement (expenditures) and sales

(revenue) both use inventory and cash resourceentities.

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Inventory Take Order

Customer

Sales Rep

Receive CashCash Rec Clerk

Shipping Clerk

Cash

Cust Ser Clerk

Verify

Availability

Request

Ship Product

Customer

Get TimeSupervisor

Worker

Payroll Clerk

Order Product

Purchasing Clerk

Supplier

Receive Product

Disburse CashCash Disb Clerk

Supplier

Receiving Clerk

Integrated REA Diagram

(Employee)

(Employee)

(Employee)

(Employee)

(Employee)

(Employee)

(Employee) (Employee)

(Employee)

(Employee)

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Step 2. Define Primary Keys, Foreign

Keys, and Attributes

Implementation into a working relational

database requires primary keys, foreign keys andattributes in tables.

Primary key uniquely identifies an instance of anentity (i.e., each row in the table)

Foreign key the primary key embedded in the relatedtable so that the two tables can be linked

Attribute a characteristic of the entity to be recordedin the table

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Rules for Foreign Keys

Primary key Foreign key: Relations are formedby an attribute that is common to both tables in therelation.

Assignment of foreign keys:

if1 to 1 (1:1) association, either of the tablesprimary key may be the foreign key

if1 to many (1:m) association, the primary key onone of the sides is embedded as the foreign key on

the other side ifmany to many (m:m) association, create a

separate linking table with a composite primarykey

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Attributes

Financial

Customer name

Customer address

Customer telephonenumber

Amount owed by

customer

Value of total sales todate

Terms of trade offered

Nonfinancial

Customer credit rating

Damaged goods

recordOn-time payment

record

Customer volume

recordEDI access

Internet access

Using the customer as an example, these data include:

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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 themmust 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.

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User-Views

User-View #1

Past Due AccountsName Amount

James $500.00Henry $100.00

Sales Report

User-View #2

REA Database

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Value Chain Analysis

Competitive advantages from the REA approachcan be see via value chain analysis.

Value chain analysis distinguishes betweenprimary activities (create value) and supportactivities (assist performing primary activities).

REA provides a model for identifying anddifferentiating between these activities.

Prioritizing Strategy: Focus on primary activities;eliminate or outsource support activities.

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Porters Value Chain

Revenue

Costs

FirmInfrastructure

Human resource management

Technology development

Procurement

Inbound

Logistics Operations

Output

Logistics

Marketing

& Sales Service

Primary Activities

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Competitive Advantages of the REA

Model

Using REA can lead to more efficient operations.

Helps managers identify non-value added activitiesthat can be eliminated

Increasing productivityvia elimination of non-valueadded activities generates excess capacity

Storing both financial and nonfinancial data in thesame central database reduces multiple datacollection, data storage, and maintenance.

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Using REA can lead to more efficient operations.

Detailed financial and nonfinancial business datasupports a wider range of management decisions

supporting multiple user views (e.g., differentperspectives on a problem)

Provides managers with more relevant, timely, andaccurate information.

leading to better customer service, higher-qualityproducts, and flexible production processes

Competitive Advantages of the REA

Model

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Continued to session 09

Thank you

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