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An REA Model of an Economic Exchange

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1 An REA Model of an Economic Exchange
William E. McCarthy* Michigan State University *http://www.msu.edu/user/mccarth4/

2 Cookie-Monster (the customer) and Elmo (the entrepreneur) meet in the (real or virtual) marketplace, thus setting the stage for an Economic Exchange

3 Economic Exchange Pattern
Event Agent Resource duality R E A Source: W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting Systems in a Shared Data Environment,” The Accounting Review, July 1982, pp W.E. McCarthy “The REA Modeling Approach to Teaching Accounting Information Systems,” Issues in Accounting Education, November 2003, pp

4 Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in a SHIPMENT (transfer of Cookie Inventory)

5 outside participation outside participation
Economic Resource COOKIES inside participation Economic Agent ELMO stock-flow Economic Event SALE Economic Agent outside participation cookie monster Give duality Take outside participation Economic Agent stock-flow Economic Event Economic Agent inside participation Economic Resource REA model of cookie sale from entrepreneur’s (ELMO) perspective

6 Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in a PAYMENT (transfer of Cash)

7 outside participation outside participation
Economic Resource COOKIES inside participation Economic Agent ELMO stock-flow Economic Event SALE Economic Agent outside participation cookie monster Give duality Take outside participation Economic Agent ELMO stock-flow Economic Event CASH RECEIPT Economic Agent inside participation cookie monster Economic Resource CASH REA model of cookie sale from entrepreneur’s (ELMO) perspective

8 outside participation
Give Take Economic Resource inside participation outside participation stock-flow Economic Event Cash Receipt Economic Agent Salesperson Customer Cashier Cash Cookies duality Sale more general exchange model from the entrepreneur’s (ELMO’s) internal perspective

9 Partial Database for Elmo’s Cookie Business
COOKIES COOKIES-stockflow-SALE Product# Description Price QOH P-1 Chocolate Chip 1.05 200 P-2 Chocolate .95 205 P-3 Peanut Butter 1.00 97 P-4 Pecan 1.10 257 Product# Invoice# Quantity P-2 I-1 5 P-3 10 I-2 20 P-4 I-3 9 P-1 I-4 4 SALE-duality-CASH_RECEIPT SALE Invoice# Dollar Amount Date Salesperson Employee# Customer # I-1 14.75 1JUL E-1234 C-987 I-2 20.00 2JUL E-1235 C-888 I-3 9.90 3JUL E-1236 C-999 I-4 9.20 5JUL E-1237 Invoice# Receipt Timestamp Amount Applied I-1 2JUL0830 14.75 I-2 3JUL0800 2.00 5JUL0800 18.00 I-3 8JUL1145 9.90 I-4 9.20 Partial Database for Elmo’s Cookie Business Why is this invoice amount $14.75 ?? How is customer paying for this ???

10 Part of ELMO’s Value Chain for Providing Cookies
A business process is a set of activities that takes one or more kinds of input and creates an output that is of greater value to the customer (Hammer and Champy) business process labor cookies Conversion Cycle business process Revenue Cycle cash business process cookie ingredients Acquisition Cycle cash value chain A value chain is a purposeful network of business processes aimed at assembling the individual components of a final product (i.e., its portfolio of attributes) of value to the customer (Porter and Geerts/McCarthy) Part of ELMO’s Value Chain for Providing Cookies

11 Different perspectives on REA modeling needed for enterprise modeling (value chains) and collaboration space (supply chains) Enterprise modeling (as evidenced in normal ERP systems) is done from the perspective of one company or entrepreneur. Business processes are viewed as components of a single value chain. A single exchange (like the sale of a product for money) would be modeled twice, once in the enterprise system of each trading partner. Collaboration space modeling (as evidenced in ebXML or ISO Open-edi) is done from a perspective independent of each trading partner. A single exchange is modeled once in independent terms that can be then mapped into internal enterprise system components. Supply chains are networks of business processes that alternate internal transformations and external exchanges (definition due to Bob Haugen). REA modeling works in both cases and the independent to trading partner mapping is absolutely straightforward and completely defined.

12 Used for collaboration space modeling
Business Process Independent view of Inter-enterprise events Enterprise Illustration of Perspective: Trading Partner vs. Independent Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers) Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies Used for collaboration space modeling SOURCE: Adapted from ISO , K. Morita

13 COOKIES ELMO SHIPMENT ELMO CASH cookie monster cookie monster
Economic Resource Economic Agent COOKIES participation ELMO stock-flow Economic Event SHIPMENT Economic Agent participation cookie monster initiating transfer duality responding transfer Economic Agent participation ELMO stock-flow Economic Event PAYMENT Economic Agent participation Economic Resource cookie monster CASH REA model of cookie sale from independent (collaboration space) perspective

14 Cookie-Monster and Elmo after their economic exchange (both economic agents have now reached higher levels of utility)

15 Cookie Monster and Elmo are of course characters from the Public Broadcasting Service TV show Sesame Street*. Their use here is only illustrative. Cookie Monster is a great example of a typical buyer (has money, wants goods) because he is most happy when he has a cookie to eat. The use of Elmo as a typical seller (has goods, wants money) is only a convenient illustration. The Cookie Monster shown was a favorite toy of my daughter Meghan. The Elmo was bought for me by my wife Jane. * see


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