Chapter 1 Business Processes, Data Modeling and Information Systems

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 Model a company’s business processes

using an REA diagram

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?

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 (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.

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 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

Economic Event

Get Resource A

Economic Resource A

Economic Resource B

Economic Event

Give Resource B

Resource Events Agents

Economic Agent I

Economic Agent II

Economic Agent III

Economic Agent IV

Inflow

Inside participation

Outside participation

Economic duality

Figure 1-1 The REA Pattern*

Outflow

Inside participation

Outside participation

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.

Basic Economic Events in Transaction Cycles

Machine Operation

Duality

Figure 1-2Basic Economic Events in Transaction Cycles

Sale

Duality

Cash Receipt

Revenue Cycle

Purchase

Duality

Cash Disbursement

Expenditure Cycle

Labor Acquisition

Duality

Cash Disbursement

Human Resource/Payroll Cycle

Cash Receipt

Duality

Cash Disbursement

Financing Cycle

Conversion (Production) Cycle

Finish Goods Inventory

Labor Operation

Duality

Material Issurance

Duality

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.

Overall REA Model for an AISFigure 1-3

Overall REA Model for an Accounting Information System*

Revenue Cycle

Sale

Duality

Cash Receipt

Financing Cycle

Cash Receipt

Duality

Cash Disbursement

Human Resource/Payroll Cycle

Labor Acquisition

Duality

Cash Disbursement

Expenditure Cycle

Purchase

Duality

Cash Disbursement

Conversion (Production) Cycle

Machine Operation

Duality

Finish Goods Inventory

Labor Operation

Duality

Material Issurance

Duality

Financial Reporting System

Cash

Cash

Cash

Data

Data

Data

Data

Data

Labor

MaterialsFinished Goods

REA: Revenue and Expenditure Cycles

PurchaseInventory

CashCash

Disbursement

Resource Events Agents

Purchasing Agent

Vendor

Vendor

Cashier

Inflow

Outflow

Inside participation

Outside participation

Outside participation

Inside participation

Purchase-Cash Disbursement

Figure 1-4 Sample REA Diagrams for Revenue and Expenditure Cycles

Expenditure Cycle

SaleInventory

Cash Cash Receipt

Salesperson

Customer

Customer

Cashier

Outflow

Inflow

Inside participation

Outside participation

Outside participation

Inside participation

Sale-Cash Receipt

Revenue Cycle

Relationships between Entities

Eric 5"8"

has height

Ben Vehicle#104

owns

John Lewis Marketing

teaches

Person Vehicleowns

Person Heighthas

Professor Courseteaches

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.

Person-Height Example

Eric

Emily

Michael

Tina

5'5"5'6"5'7"5'8"5'9"6'0"6'1"6'2"

Person Heighthas(1,1) (0,N)

Person Heighthas(1,1) (0,N)

Professor-Course Example

John Lewis

Mary James

Alex Davis

Jennifer Bell

Financial AccountingBusiness LawLinear AlgebraMarketingData StructureCalculusDatabase ManagementComputer Programming

ProfessorCourse

teaches(1,N) (0,N)

Professor Courseteaches(1,N) (0,N)

Using REA to Model Business Processes

Three basic steps to construct an REA diagram to depict a company’s business processes:

1) Identify economic exchange events.2) Identify the resources affected by each economic

event and the agents who participate in those events.

3) 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

Duality

Cash Receipt

Identify economic exchange events in the cycle

Basic REA Diagram for Cherokee’s Revenue Cycle

SalesInventory

Cash(Bank Account)

Cash Receipt

Jesse

Customer

Customer

Jesse

Outflow

Inflow

Inside participation

Outside participation

Outside participation

Inside participation

Duality

Resource EventsAgents

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

Cash-Cash Receipt Relationship (R-E)

Cash(Bank Account)

Cash ReceiptInflow(1,N) (1,1)

Determine the cardinalities of each relationship

Inventory-Sales Relationship (R-E)

SalesInventory Outflow

(1,N)(0,1)

Sales-Cash Receipt Relationship

Sales

Cash Receipt

Duality

(1,1)

(1,1)

(E-E, without accounts receivable)

Sales-Cash Receipt Relationship

Sales

Cash Receipt

Duality

(0,1)

(1,N)

(E-E, with accounts receivable)

Complete REA Diagram for Cherokee’s Revenue Cycle

(1,N)(0,1)

(0,N)

(1,1)

(1,1)

(1,N)

(1,1)

(1,1)(1,N)

(1,1)

(1,1)

(0,N)

(1,N) (1,1)

SaleInventory

Cash(Bank Account)

Cash Receipt

Jesse

Customer

Outflow

Inflow

Insideparticipation

Outsideparticipation

Duality

Outsideparticipation

Insideparticipation

Purchase-Cash Disbursement Relationship (E-E)

Purchase

Duality

CashDisbursement

Identify economic exchange events in the cycle

Basic REA Diagram for Cherokee’s Expenditure Cycle

PurchaseInventory

Cash(Bank Account)

CashDisbursement

Jesse

Artist/Seller

Artist/Seller

Jesse

Inflow

Outflow

Insideparticipation

Outsideparticipation

Outsideparticipation

Insideparticipation

Duality

Resource EventAgent

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

Cash-Cash Disbursement Relationship (R-E)

Cash(Bank Account)

CashDisbursement

Outflow(1,N) (1,1)

Determine the cardinalities of each relationship

Inventory-Purchase Relationship (R-E)

PurchaseInventory Inflow

(1,1) (1,N)

Purchase-Cash Disbursement Relationship

Purchase

CashDisbursement

Duality

(0,N)

(1,N)

E-E, with accounts payable

Complete REA Diagram for Cherokee’s Expenditure Cycle

(1,N)(1,1)

(0,N)

(1,1)

(1,1)

(1,N)

(0,N)

(1,N)

(1,N)

(1,1)

(1,1)

(0,N)

(1,N) (1,1)

PurchaseInventory

Cash(Bank Account)

Cash Disbursement

Jesse

Artist/Seller

Insideparticipation

Outsideparticipation

Duality

Outsideparticipation

Insideparticipation

Outflow

Inflow

Comprehensive REA Data Model for Cherokee Art and Antique Store

(1,N) (1,1)

(0,N)

(1,1)

(1,1)

(1,N)(0,N)

(1,N)(1,N)

(1,1)

(1,1)

(0,N)

(1,N)(1,1)

(1,N)(0,1)

(0,N)

(1,1)

(1,1)

(1,N)

(1,1)

(1,1)(1,N)

(1,1)

(1,1)

(0,N)

(1,N) (1,1)

SaleInventory

Cash(Bank Account)

Cash Receipt

Customer

Outflow

Inflow

Duality

Jesse

Inflow

Outflow

Purchase

Cash Disbursement

Artist/Seller Duality

Outside Participation

Outside Participation

Inside Participation

Inside Participation

Outside Participation

Outside Participation

Inside Participation

Inside Participation

Revenue CycleExpenditure Cycle

End of Chapter 1