Chapter 10

The REA Approach to

Database Modeling

Accounting Information
Systems 9e
James A. Hall
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 Objectives for Chapter 10
• Recognize the economic foundations of the resources,
events, and agents (REA) model.
• Understand the key differences between traditional entity
relationship modeling and REA modeling.
• Understand the structure of an REA diagram.
• Be able to create an REA diagram by applying the view
modeling steps to a business case.
• Be able to create an entity-wide REA diagram by applying
the view integration steps to a business case.

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 The REA Approach
• Managers need financial and nonfinancial information in
formats not provided by GAAP-based accounting systems.
– Creating separate information systems to support each user’s
view results in multiple functionally disconnected systems with
accuracy and data currency problems.
• Has led to the development of semantic models of AIS that
support multiple user views.
• REA model is an accounting framework for modeling critical
resources, events, agents and relationship between them.
– Permits both accounting and non-accounting data to captured.
– May be implemented with either relational or object-oriented
database architectures.

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• REA model is a unique version of an entity relationship (ER)
diagram with three entity types (resources, events and
agents) and the associates linking them. (REA diagram).

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 Elements of an REA Model
• Economic resources are things of economic value.
– Objects that are scarce and under control of the organization.
– Used in exchanges and increased or decreased by the exchange.

• Events fall into two groups:

– Economic events effect increases or decreases in resources as
represented by the stock flow.
– Support events are control, planning, and management
activities related to economic activities that do not directly
effect a resource change.
• Agents are individuals and departments that participate in
economic and support events.
– Each event associated with at least one internal agent and one
external agent that participates in the exchange.

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• Exchanges are a pair of economic events (duality). The
connection between these dual events is the give event and
the receive event.

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 Differences between ER and REA Diagrams

• Entities:
– One class in ER diagrams, determined by cardinality and
readability.
– Three classes in an REA diagram (resources, events, and agents),
organized into constellations by class.
• Sequencing of events:
– ER diagrams present static picture of underlying business phenomena.
– REA diagrams focus on the sequence of events.
• Naming conventions for entities:
– ER diagram entity names always in the singular noun form.
– REA diagrams apply this rule when naming resources and agent
entities but events are given verb (action) names.

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 View Modeling: Creating an Individual REA Diagram
• Step 1: Identify the event entities.
– At a minimum must include the two economic give and receive
activities that reduce and increase economic resources in
exchange.
– May include support events but focus is on value chain.
– Events that do not add value (i.e. bookkeeping tasks) should not
be included.
• Step 2: Identify the resource entities.
– Each event must be linked to at least one resource entity whose
economic value will be either reduced or increased by event.
– Economic events directly affect resources.
– Support events indirectly affect them.

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 View Modeling: Creating an Individual REA Diagram
• 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 and one external
agent.
• Step 4: Determine associations and cardinalities between
entities.
– Association is the nature of the relationship between two entities,
represented by the labeled line connecting them.
– 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.
• Reflects business rules in play for a particular organization.
• Sometimes the rules are obvious and the same for all organizations.

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 Many-to-Many Associations
• Many-to-many (M:M) associations must be reconciled.
– Result on repeating group data that need to be normalized
before implementing the model in a relational database.
• Solution is to create link tables that contain the primary
keys of the associated tables.
• When modeling traditional ER diagrams, convenient to
include the link tables in the model so that it closely
reflects the actual database.
– Creates a conflict with the rules that an event entity should be
connected to at least one resource and two agent entities.
– Technical requirement for implementing an M:M association but
not for modeling the database.

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 View Integration:
Creating an Enterprise-Wide REA Model
• View integration is the integration of multiple REA diagrams
into a single global or enterprise model and involves three basic
steps:
• Step 1: Consolidate the individual models.
– Redundant event, agent, and resource entities collapsed into a single
entity where possible.
• Step 2: Define primary keys, foreign keys, and attributes.
– Separate table constructed for each valid entity in the REA integrated
diagram.
– Primary key should logically and uniquely define the nonkey attributes
in the table.
– Degree of association between tables determines how foreign keys are
assigned.

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 Normalized Tables
• Assignment of primary keys and attributes to relational tables
must always comply with normalization rules.
• One or more anomalies will exist in tables that are not
normalized to the third normal form (3NF) level.
• Tables in 3NF will be free of anomalies and meet two
conditions:
– All nonkey attributes will be wholly and uniquely dependent on (defined
by) the primary key.
– None of the nonkey attributes will be dependent on (or defined by)
other nonkey attributes.
• Databases are not static.
– As needs change additional attributes and tables may be needed.

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 View Integration:
Creating an Enterprise-Wide REA Model
• Step 3: Construct the physical database and produce user
views.
– Create physical relational tables based on table descriptions.
– Resources and agents must be initialized with data values.
– Resulting database should be rich enough to support information
needs of all system users.
• Financial statements and other accounting reports can be
constructed from underlying event data.
– Accounting figures extracted from REA tables used to prepare
statements and even journal vouchers.
– Management reports are also created from REA tables.

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 REA and 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 primary activities).
– REA approach to modeling business processes helps managers
focus on key economic events and identify nonvalue-added
activities that can be eliminated.
• Storage of financial and nonfinancial data in a common data
base supports multiple user views and reduces multiple data
collection, storage and data procedures.
• REA model provides more relevant, timely, accurate info.
• In practice, many organizations with an REA model still
maintain a traditional GL system for financial reporting.
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