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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 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