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 users 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
double-entry,
debits and credits
== Liabilities
++ Owners
Assets
Liabilities
Owners Equity
Equity
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 organizations
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.

Revenue
Costs
Firm Infrastructure
Human resource management
Technology development
Procurement
Inbound
Operations
Logistics

Output
Logistics

Primary Activities

Marketing
& Sales

Margin

Support Activities

Porters Value Chain

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