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Chapter 1. Business Processes, Data Modeling and Information Systems. Learning Objectives. Identify entities and relationships in a business process Identify resources, events and agents (REA) in a business process Evaluate and determine the cardinalities

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chapter 1

Chapter 1

Business Processes, Data Modeling and Information Systems

learning objectives
Learning Objectives
  • Identify entities and relationships in a business process
  • Identify resources, events and agents (REA) in a business process
  • Evaluate and determine the cardinalities
  • Model a company’s business processes using an REA diagram
legacy versus modern ais
Legacy versus Modern AIS
  • Legacy accounting information systems
    • Flat files with disconnected subsystems
  • Modern accounting information systems
    • Use database approach that emphasizes the integration and sharing of data across major functional areas
    • Designed based on a company’s business processes
    • Event-driven based upon business processes
what is data modeling
What is Data Modeling?
  • The process of creating a logical representation of the structure of a database based on a company’s business processes
  • The most important task in the development of an effective database is to provide useful information
entity relationship diagram
Entity-Relationship Diagram
  • Entity-Relationship Diagram (ERD) is a commonly used business data modeling technique.
  • The ERD uses a graphical representation to identify and document various entities and the relationships between those entities.
  • Three major components of an ERD are the entity, the relationship, and the attribute.
slide6
ERD
  • An entity is anything about which a company would like to collect and store information.
    • Example: inventory, purchase, vendor, etc.
    • It is represented using a rectangle.
  • A relationship is an association between entities.
    • Example: one-to-one, one-to-many
    • It is represented using a diamond.
  • An attribute is a characteristic of an entity, such as the inventory number and the description of each item in the entity of “inventory.”
resource event agent rea diagram
Resource-Event-Agent (REA) Diagram
  • REA diagram is a framework specifically designed for building accounting information systems in a shared data environment based on the ERD technique.
  • Components in an REA diagram:
    • Resources: Things that have economic value to a company, such as cash and inventory.
    • Events: Various business processes conducted in a company’s daily operations, such as sales and purchases.
    • Agents: People and organizations, such as customers and salespeople, who participate in business events.
rea diagram
REA Diagram
  • A general rule: each economic event should be linked to at least one economic resource and two economic agents.
  • The relationship shown between the two economic events is referred to as an economic duality relationship. The causal relationship occurs as a result of a give and a take happening.
transaction cycles and rea modeling
Transaction Cycles and REA Modeling
  • The transaction cycles are combined into an REA model to create the entire accounting information system (see Figure 1-3).
  • This high-level conceptual model indicates how the transaction cycles interact with each other and with the financial reporting system.
cardinalities
Cardinalities
  • The number of instances one entity can be linked to one specific instance of another entity.
  • Restricts the number of participation constraints in a relationship.
  • A cardinality is denoted as (min,max) where min is the minimum number and max is the maximum number that can participate in a relationship.
using rea to model business processes
Using REA to Model Business Processes
  • Three basic steps to construct an REA diagram to depict a company’s business processes:
    • Identify economic exchange events.
    • Identify the resources affected by each economic event and the agents who participate in those events.
    • Determine the cardinalities of each relationship.
  • After the business processes are modeled, the REA diagram should be validated by the company’s experts who are knowledgeable about the details and the objectives of the business processes.
sales cash receipt relationship e e
Sales-Cash Receipt Relationship (E-E)

Identify economic exchange events in the cycle

basic rea diagram for cherokee s revenue cycle
Basic REA Diagram for Cherokee’s Revenue Cycle

Identify the resources affected by each economic event and the agents who participate in those events

Agents

Resource

Events

cash cash receipt relationship r e
Cash-Cash Receipt Relationship (R-E)

Determine the cardinalities of each relationship

sales cash receipt relationship
Sales-Cash Receipt Relationship

(E-E, without accounts receivable)

sales cash receipt relationship23
Sales-Cash Receipt Relationship

(E-E, with accounts receivable)

purchase cash disbursement relationship e e
Purchase-Cash Disbursement Relationship (E-E)

Identify economic exchange events in the cycle

basic rea diagram for cherokee s expenditure cycle
Basic REA Diagram for Cherokee’s Expenditure Cycle

Identify the resources affected by each economic event and the agents who participate in those events

Agent

Resource

Event

cash cash disbursement relationship r e
Cash-Cash Disbursement Relationship (R-E)

Determine the cardinalities of each relationship

purchase cash disbursement relationship
Purchase-Cash Disbursement Relationship

E-E, with accounts payable