Chapter 10 the rea approach to business process modeling
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Chapter 10 The REA Approach to Business Process Modeling. 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.

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Chapter 10 the rea approach to business process modeling

Chapter 10The REA Approach to Business Process Modeling

Objectives for chapter 10
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.

Traditional approaches user view orientation
Traditional Approaches:User-View Orientation

  • When data-modeling and IS design is too oriented toward the user’s views, problems arise:

    • multiple information systems

    • duplication of data

    • restricted user-view leads to poor decision-making

    • inability to support change

R esources e vents and a gents model
Resources, Events, and Agents Model

  • REA is 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

R esources e vents and a gents model1
Resources, Events, and Agents Model

  • REA models consists of three entity types and the associations linking them.

  • Resources

  • Events

  • Agents

R esources in the r ea model
Resources in the REA Model

  • Resources – the ‘assets’ of the company

    • things of economic value

    • objects of economic exchanges 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:

    • artifacts that can be generated from other primary data

    • for example, accounts receivables

E vents in the r e a model
Events in the REA Model

  • Events are phenomena that effect changes in resources.

    • a source of detailed data in the REA approach to databases

  • Events fall into two groups:

    • Economic – increases or decreases resources

    • Support – control, planning, and other management activities; but do not directly affect resources

A gents in the re a model
Agents in the REA Model

  • Agents can be individuals or departments.

  • Participate in events

  • 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

Chapter 10 the rea approach to business process modeling


External Economic


Stock Flow




Internal Economic




Basic REA Model

Figure 10-1

R esources e vents and a gents model2
Resources, Events, and Agents Model

  • Another key feature of the REA model is economic duality.

    • Events occur in pairs

    • Represent the give event and receive event of an economic exchange

Chapter 10 the rea approach to business process modeling

External Agent


Out Flow

Give Economic

Resource A


Internal Agent


Internal Agent


Receive Economic

Resource B


External Agent

REA Model showing Duality of a Give and Receive Exchange


Give Activity

Receive Activity



Figure 10-2

Er diagrams erd s versus rea diagrams read s
ER Diagrams (ERD’s) versus REA Diagrams (READ’s)

  • Classes of entities

    • ERD’s – one class

    • READ’s – three classes (resources, events, and agents)

  • Arrangement of entities

    • ERD’s – determined by cardinality and readability

    • READ’s – organized into constellations by class

  • Sequencing of events

    • ERD’s – static

    • READ’s – chronological sequence of business processes

  • Naming conventions

    • ERD’s – all nouns

    • READ’s – nouns (R’s and A’s) and verbs (E’s)

View modeling creating an individual rea diagram
View Modeling: Creating an Individual REA Diagram

  • View modeling is a multistep process for creating an individual REA model.

    • The result is a single view of the entire database.

  • The four steps involved are:

    • Identify the event entities to be modeled.

    • Identify the resource entities changed by events.

    • Identify the agent entities participating in events.

    • Determine associations and cardinalities between entities.

Step 1 identify the event entities
Step 1: Identify the Event Entities

  • Identify the events that are to be included in the model.

    • Include at least two economic events (duality)

    • May include support events

    • Arrange events in chronological sequence

  • Focus on value chain events.

  • Do not include invalid events such as:

    • bookkeeping tasks

    • accounting artifacts, e.g., accounts receivable

Chapter 10 the rea approach to business process modeling

Verify Availability

Take Order


Receive Cash

Arrangement of Events Entities in Order of Occurrence


Order of Events

Figure 10-5

Step 2 identify the resource entities
Step 2. Identify the Resource Entities

  • Identify the resources impacted by events identified in step 1.

  • Each event must be linked to at least one resource.

    • Economic events directly affect resources.

    • Support events indirectly affect them.

Step 3 identify the agent entities
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

    • One external agent

  • It is possible to have only an internal agent when no exchange occurs, as with certain ‘internal’ manufacturing processes.

Step 4 determine associations and cardinalities between entities
Step 4. Determine Associations and Cardinalities between Entities

  • Association – reflects the nature of the relationship between two entities

    • Represented by the labeled line connecting the entities

  • 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

  • Cardinality reflects the business rules that are in play for a particular organization.

    • Sometimes the rules are obvious and are the same for all organizations.

    • Sometimes the rules differ, e.g., whether inventory items are tracked individually or as quantity on hand.

Many to many associations
Many-to-Many Associations Entities

  • Many-to-many (M:M) associations cannot be directly implemented into relational databases.

  • They require the creation of a new linking table.

    • This process splits the M:M association into two 1:M associations.

    • The linking table requires a ‘composite primary key’.

Chapter 10 the rea approach to business process modeling

Link Tables in an REA Diagram Entities

Figure 10-9

View integration creating an enterprise wide rea model
View Integration: Creating an Enterprise-Wide REA Model Entities

  • View integration – combining several individual REA diagrams into a single enterprise-wide model

  • The three steps involved in view integration are:

    • Consolidate the individual models.

    • Define primary keys, foreign keys, and attributes.

    • Construct physical database and produce user views.

Step 1 consolidate the individual models
Step 1. Consolidate the Individual Models Entities

  • Merging multiple REA models requires first a thorough understanding of the business processes and entities involved in the models.

  • Individual models are consolidated or linked together based on shared entities.

    • For example, procurement (expenditures) and sales (revenue) both use inventory and cash resource entities.

Integrated rea diagram
Integrated REA Diagram Entities

Figure 10-12

Step 2 define primary keys foreign keys and attributes
Step 2. Define Primary Keys, Foreign Keys, and Attributes Entities

  • Implementation into a working relational database requires primary keys, foreign keys and attributes in tables.

    • Primary key – uniquely identifies an instance of an entity (i.e., each row in the table)

    • Foreign key – the primary key embedded in the related table so that the two tables can be linked

    • Attribute – a characteristic of the entity to be recorded in the table

Rules for foreign keys
Rules for Foreign Keys Entities

  • Primary key  Foreign key: Relations are formed by an attribute that is common to both tables in the relation.

  • Assignment of foreign keys:

    • if 1 to 1 (1:1) association, either of the table’s primary key may be the foreign key

    • if 1 to many (1:m) association, the primary key on one of the sides is embedded as the foreign key on the other side

    • if many to many (m:m) association, create a separate linking table with a composite primary key

Attributes Entities

Using the customer as an example, these data include:


Customer name Customer address Customer telephone number

Amount owed by customer

Value of total sales to date

Terms of trade offered


Customer credit rating

Damaged goods record

On-time payment record

Customer volume record

EDI access

Internet access

Step 3 construct physical database and produce user views
Step 3. Construct Physical Database and Produce User Views Entities

  • The database designer is now ready to create the physical relational tables using software.

  • Once the tables have been constructed, some of them must be populated with data.

    • Resource and Agent tables

  • Event tables must wait for business transactions to occur before data can be entered.

  • The resulting database should support the information needs of all users.

    • SQL is used to generate reports, computer screens, and documents for users.

User views
User-Views Entities

User-View #1

User-View #2

REA Database

Sales Report

Past Due Accounts

Name Amount

James $500.00

Henry $100.00

… …

Value chain analysis
Value Chain Analysis Entities

  • 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 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.

Competitive advantages of the rea model
Competitive Advantages of the EntitiesREA Model

  • Using REA can lead to more efficient operations.

    • Helps managers identify non-value added activities that can be eliminated

      • Increasing productivityvia elimination of non-value added activities generates excess capacity

    • Storing both financial and nonfinancial data in the same central database reduces multiple data collection, data storage, and maintenance.

Competitive advantages of the rea model1
Competitive Advantages of the EntitiesREA Model

  • Using REA can lead to more efficient operations.

    • Detailed financial and nonfinancial business data supports a wider range of management decisions

      • supporting multiple user views (e.g., different perspectives on a problem)

    • Provides managers with more relevant, timely, and accurate information.

      • leading to better customer service, higher-quality products, and flexible production processes