Presentation on theme: "The REA Approach to Business Process Modeling"— Presentation transcript:
1 The REA Approach to Business Process Modeling Chapter 10The REA Approach to Business Process Modeling1
2 Objectives for Chapter 10 Limitations of traditional database systemBenefits of adopting an REA approach to information systems compared to a traditional approachImplications of REA for the accounting professionSteps involved in preparing an REA model of a business processImportance of identifying the attributes of entity relations in relational database designDifferences between an REA model representation of a business process and an ER diagram representation31
3 Traditional Approaches: User-View Orientation When data-modeling and IS design is too oriented toward the user’s views, problems arise:multiple information systemsduplication of datarestricted user-view leads to poor decision-makinginability to support change
4 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:double-entry, debits and creditshigh level of aggregationignoring non-financial datainability to serve diverse enterprise-wide needsAssets = Liabilities + Owners’ Equity
5 Resources, Events, and Agents Model An approach to database design meant to overcome problems with traditional approaches:formalized data modeling and design of ISuse of centralized databaseuse of relational database structurecollects detailed financial and non-financial datasupports accounting and non-accounting analysissupports multiple user viewssupports enterprise-wide planning
6 Resources, Events, and Agents Model The REA model is an alternative accounting framework for modeling an organization’seconomic resourceseconomic eventseconomic agents, andinterrelationshipsA variation of the Entity-Relationship diagramming is used to model these relationships.42
7 Resources in the REA Model Economic resources are the assets of the company.able to generate revenueobjects that are scarce and under the control of the organizationcan be tangible or intangibleDoes not include some traditional accounting assets:for example, Accounts Receivablesthese are artifacts that can be generated from other primary data42
8 Events in the REA ModelEconomic events are phenomena that effect changes in resources.a source of detailed data in the REA approach to databasesThree classes of events:operating events--what happensinformation events--what is recordeddecision/management events--what is done as a resultOnly operating events are included in the REA model.42
9 Agents in the REA Model Can be individuals or departments Can participate in eventsCan affect resourceshave discretionary power to use or dispose of resourcesCan be inside or outside the organizationclerksproduction workerscustomerssuppliers, vendorsdepartments, teams42
10 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.
11 Resources, Events, and Agents Model A variation of the Entity-Relationship diagramming is used in REA modeling.ER-Diagram Symbols42
12 Resources, Events, and Agents Model A variation of the Entity-Relationship diagramming is used in REA modeling.ER-Diagram Symbolsentityrelationship(optional)attribute(optional)42
13 Advantages of the REA Model More efficient operationsIt 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 proceduresStoring 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 capacityCompetitive advantage by providing more relevant, timely, and accurate information43
14 Value Chain AnalysisThe 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.43
15 Human resource management Technology development Porter’s Value ChainRevenueCostsFirm InfrastructureHuman resource managementSupport ActivitiesTechnology developmentProcurementMarginInbound LogisticsOperationsOutputLogisticsMarketing& SalesServicePrimary Activities
16 Database Applications Phase 1Flat FilesPhase 2Event-DrivenDatabasePhase 3REA-ModelDatabaseLimitations:Not widely used;Requires detailed analysisLimitations:Redundant data;AnomaliesLimitations:Loss of non-economic information
17 Database Sales Order Entry/Cash Receipts System
19 Limitations of Transaction-Based Systems Event: a single business activity within a business process which involves resources and agentsTraditional event-based database systems tend to focus exclusively on economic events.loss of non-economic/non-financial informationREA is event-oriented v. event-based.i.e., includes non-economic and economic event information
20 Developing an REA Model: Overview Before developing the REA model, identify events and classify as:Operating events--activities that produce goods and servicesInformation events--activities associated with recording, maintaining, and reporting informationDecision/Management events--activities that lead to decisions being takenREA model uses only operating events.
21 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.
22 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.
23 REA Example: Horizon Books AnswerQueryMakeSaleReceivePaymentStep 1: Identify operating events in Horizon Books’ sales model.
24 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 verb-object.This facilitates arranging them in order of occurrence.Note also that the verb is represented from the perspective of the organization, not the customer.
25 REA Example: Horizon Books Step 2: Place Horizon Books’ operating events in sequence.
26 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?
27 REA Example: Horizon Books Step 3: Identify resources and agents associated with events.
28 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.
29 REA Example: Horizon Books Step 4: Establish Horizon Books’ sales process relationships.
30 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)
31 REA Example: Horizon Books Step 5: Completed REA model of Horizon Books’ sales process with cardinalities.
32 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
33 Developing an REA Model: Attributes Using the customer as an example, these data include:FinancialCustomer name Customer address Customer telephone numberAmount owed by customerValue of total sales to dateTerms of trade offeredNonfinancialCustomer credit ratingDamaged goods recordOn-time payment recordCustomer volume recordEDI accessInternet access
34 Developing an REA Model: User-Views REA DatabaseSales ReportPast Due AccountsName AmountJames $500.00Henry $100.00… …
35 REA Model v. ER-DiagramThe 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.