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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

Bina Nusantara

Details of the Material
• The REA Approach • Developing an REA Model • View Integration: Creating an Enterprise-Wide REA Model

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 user’s 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


 Can be inside or outside the organization
 Clerks  Production workers

 Customers
 Suppliers, vendors  Departments, teams

Elemental REA Model


External Economic Agent

Economic Resource

Stock Flow

Economic Event



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

Resource A

Out Flow

Give Economic Event

Give Activity

Internal Agent

Receive Activity

Resource B

Internal Agent


Receive Economic Event


External Agent

ER Diagrams (ERD’s) versus REA Diagrams (READ’s)
 Classes of entities
 ERD’s – one class

 READ’s – three classes (resources, events, and agents)

 Arrangement of entities
 ERD’s – determined by cardinality and readability  READ’s – organized into constellations by class

 Sequencing of events
 ERD’s – static  READ’s – chronological sequence of business processes

 Naming conventions  ERD’s – all nouns  READ’s – nouns (R’s and A’s) and verbs (E’s)

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

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

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.



Customer Services Clerk


Verify Availability Customer

Customer Inventory Take Order Sales Representative

Shipping Clerk Inventory Ship Product 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


Process Order



Take Order

Sales Representative



Shipping Clerk


Ship Product





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

Places Order

Process Order


InventoryOrder Link

Take Order

Sales Representative



Shipping Clerk

Inventory-Ship Link

Ship Product


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

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

Verify Availability
Supplier Request

Receiving Clerk (Employee) Receive Product


Sales Rep Inventory Take Order

Shipping Clerk
Cash Disb Clerk (Employee)
Disburse Cash


Ship Product
Payroll Clerk (Employee)


Worker (Employee)


Receive Cash

Cash Rec Clerk

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 table’s 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

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-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.

Porter’s 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

Bina Nusantara