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Overview of er and rea approach By: Prof.

Rebecca Raganas-Maquiling INTRODUCTION OBJECTIVES: To know the benefits of adopting a REA approach to information systems and its implication to the accounting profession. To explain the difference between a REA model representation of a business process and an ER diagram representation. To explain the steps involved in preparing a REA model of a business process.

DATA MODELING Data modeling is the process of defining a database so that it faithfully represents all aspects of the organization, including its interactions with the external environment. Two important tools to facilitate data modeling: Entity-relationship diagramming REA data model

ENTITY-RELATIONSHIP DIAGRAMS

Peter Chen, the father of ER modelling said in his seminal paper: "The entity-relationship model adopts the more natural view that the real world consists of entities and relationships. It incorporates some of the important semantic information about the real world." ENTITY-RELATIONSHIP DIAGRAMS An ER model is an abstract way to describe a database. Describing a database usually starts with a relational database, which stores data in tables. Some of the data in these tables point to data in other tables - for instance, your entry in the database could point to several entries for each of the phone numbers that are yours. The ER model would say that you are an entity, and each phone number is an entity, and the relationship between you and the phone numbers is 'has a phone number'. Diagrams created to design these entities and relationships are called entityrelationship diagrams or ER diagrams. Entityrelationship modelling

The building blocks ENTITY-RELATIONSHIP DIAGRAMS ENTITY-RELATIONSHIP DIAGRAMING

An entity is anything about which the organization wants to collect and store information. Example: Your university collects and stores information about students, courses, enrollment activity, etc. a thing which is recognized as being capable of an independent existence and which can be uniquely identified. may be a physical object such as a house or a car, an event such as a house sale or a car service, or a concept such as a customer transaction or order. can be thought of as nouns. Examples: a computer, an employee, a song, a mathematical theorem. In a relational database- ENTITY is a separate table that store information about each distinct entity. ENTITY-RELATIONSHIP DIAGRAMING A relationship captures how entities are related to one another. Relationships can be thought of as verbs, linking two or more nouns.

Examples: an owns relationship between a company and a computer, a supervises relationship between an employee and a department, a performs relationship between an artist and a song, a proved relationship between a mathematician and a theorem. ENTITY-RELATIONSHIP DIAGRAMS EXAMPLES OF ER DIAGRAMS THE REA DATA MODEL Resources, events, agents (REA) is a model of how an accounting system can be re-engineered for the computer age. REA was originally proposed in 1982 by William E. McCarthy as a generalized accounting model, and contained the concepts of resources, events and agents (McCarthy 1982). The REA data model is a conceptual modeling tool specifically designed to provide structure for designing AIS databases. THE REA DATA MODEL

REA is a popular model in teaching accounting information systems (AIS). But it is rare in business practicecompanies cannot easily dismantle their legacy systems to meet REA's radical demands. REA has never actually been implemented, it is a data model primarily, the processing model is still vague (see Huang Wei-Peng 2005). REA MODEL The REA data model provides structure by: Identifying what entities should be included in the AIS database. Prescribing how to structure relationships among the entities in the AIS database.

BENEFITS OF REA MODEL BENEFITS The REA (Resource, Event, Agent) model serves as a means of specifying and designing an accounting information system that serves the needs of a business The REA model gets rid of many accounting objects that are not necessary in the computer age. Most visible of these are debits and creditsdouble-entry bookkeeping disappears in an REA system. Many general ledger accounts also disappear, at least as persistent objects; e.g., accounts receivable or accounts payable. The computer can generate these accounts in real time using source document records. BENEFITS REA treats the accounting system as a virtual representation of the actual business. In other words, it creates computer objects that directly represent real-world-business objects. In computer science terms, REA is an ontology COMPONENTS THE REA DATA MODEL Three basic types of entities The REA data model is so named because it classifies entities into three distinct categories: Resources that the organization acquires and uses. Events in which the organization engages Agents participating in these events.

COMPONENTS

Resources: Things that have economic value to a company. These resources can increase or decrease with any transaction occurring through Events. Ex. Cash and inventory COMPONENTS Events: They are the various business processes conducted in a companys daily operations, such as sales and purchases.

Two forms of Events Economic Support

Components cont... Economic events are the important actions that change the resources of the business (i.e. a sale- decreases inventory, purchase- increase inventory) These kinds of events must capture as much information as possible in order to provide the user with the best data for analysis (i.e. cant analysis inventory without order and sales data). Components cont... Support events are not directly affect or change resources (i.e. Inventory verifications). Verification customer account Verifiction accounts payable Queries on how much our sales. Reports... Aging of receivables COMPONENTS

Agents: People and organizations, such as customers and salespeople, who participate in business events. internal and external. Ex. Customer is an external agent participate in a sales transaction with an employee an internal agent.

Supplier is an external agent participate in a purchase transaction with an employee as internal agent. Developing the rea model Step 1: Identify the Event Entities for the Revenue Cycle Model The first step in developing a REA model is to identify the event entities of the business function. An REA model must, at minimum, include two economic events that comprise the give and receive activities (reduce and increase) of economic resources in the exchange. The event entities are the following: Sale Transaction: An economic event that is the give half of an economic exchange and reduces inventory (resource) directly. Receive Cash: An economic event that is the receive half of an economic exchange and increases cash (resource) holdings. Its important to remember that REA modeling focuses on value chain events. Events that use cash to obtain resources and then uses those resources to earn new revenues. Step 2: Identify the Resource Entities for the Revenue Cycle Model The next step in develop the REA diagram is to identify the resources that are impacted by the selected events. Each economic event in an REA model must have a relationship with at least one economic resource whose value increases or decreases when the transaction takes place.

In the our example revenue cycle model, economic events change only two resources: 1. The sale transaction event reduces inventory resource. 2. The receive cash increases the cash resource. Step 3: Identify the Agents Each economic event entity in a REA diagram is associated with, at minimum, two agents entities. As stated earlier, one agent is internal to the business and the other is an external agent. For the revenue cycle, the external agent associated with the events are customers (external) and employee (internal). Step 4: Determine Association(s) and Cardinalities Associations are the nature of the relationship between entities. Usually a labeled line connecting them represents an association. Cardinality, the degree of association between entities, describes the number of possible occurrences in one entity that are associated with a single occurrence in a related table.

Basic forms are 1:1, 1:M, and M:M.The following are associations and cardinalities for our example revenue cycle: CARDINALITIES Cardinality between Inventory and Sales Transaction: An M:M cardinality implies that a particular sales transaction may contain many different items of inventory and an item may have been sold many times. Cardinality between Sales Transaction and Employee: A 1:M cardinality suggest that an employee could participate in many transactions, and sales transactions can be completed by one employee. Cardinality between Customer and Sales Transaction: A 1:M cardinality suggest that a customer participates in many sales transactions, and sales transaction can only have one customer. Cardinality between Sales Transaction and Receive Cash: A 1:M cardinality suggest that cash received from many customers and is deposited into one account. The cash resource of an organization is composed of several accounts, such as general operating accounts, payroll, petty cash, and so on. These are consolidated for financial reporting into a single account, but are used and tracked separately. Cardinalities... Many to many associations pose a problem and must be reconciled. M:M associations exist as a result of repeating group data that needs to be normalized before implementing the model in a relational database. The solution is to create a link tables that contains primary keys of associated tables. The figure below shows the Revenue Cycle diagram with associated link tables. THE REA DATA MODEL THE REA DATA MODEL with cardinality. Purchase and Cash Disbursement Procedure Product Orders Made/Received entity is a support event that does not directly increase inventory resource. The quantity on hand will not be increased until items are received. The order information prevents items from being accidentally reordered and will assist in status updates for out of stock items. This entity becomes an economic event, causing a change in the inventory resource, when products are received. This is the receive half of the exchange. The 1:M association between supplier and product order made/received indicates that each order goes only to one supplier. The Disburse Cash entity is an economic event that makes up the give half of the economic exchange that causes a decrease to cash. The 1:M association with supplier implies that each

disbursement is made to one supplier, but each supplier may receive many disbursements during any given period. Pay Roll Procedure The REA diagram below shows the model for the payroll procedure. The model consists of two economic events: Get Time and Disburse Cash. Get Time event is the receive half of the economic exchange. This involves a worker, an internal agent, giving up time. Which then the supervisor, the external agent, takes control of the resource. The Get Time event increases time, captured through a time keeping mechanism. The cardinality in the association between Get Time, Worker, and Supervisor entities reflects that some employees contribute time over different periods. The Disburse Cash entity event is the give half of the economic exchange. This involves distributing cash to an employee for services rendered, which reduces the cash resource. The association between Disburse Cash and Get Time event implies the timing differences between employees giving their time and receiving payment for it. A 1:M cardinality on the Get Time side implies that there at many instances a Get Time event will exist, however, is paid only once. The Disburse Cash entity event is the give half of the economic exchange. This involves distributing cash to an employee for serves rendered. The supervisor, participates in this event, which reduces the cash resource. The association between Disburse Cash and Get Time event implies the timing differences between employees giving up their time and receiving payment for it. A 1:M cardinality on the Get Time side of the association implies that at many instances a Get Time will exist, however, is paid only once.

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