Summary of The REA Approach to Database Modeling

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Summary

This chapter examined the REA model as a means of specifying and designing accounting information systems that serve the needs of all users in an organization. It began by defining the key elements of REA. The basic model employs a unique form of an ER diagram called an REA diagram, which consists of three entity types (resources, events, and agents) and a set of associations linking them. The rules for developing an REA diagram were then explained and illustrated in detail.

Each event in an REA diagram is linked to at least one resource and to at least two agents. An important aspect of the model is the concept of economic duality, which specifies that each economic event must be mirrored by an associated economic event in the opposite direction. These dual events constitute the give and receive activities in an economic exchange.

The chapter went on to illustrate the development of an REA database for a hypothetical firm following a multistep process called view modeling. The steps involved are: (1) identify the event to be modeled, (2) identify the resource changed by events, (3) identify the agents participating in events, and

(4) determine associations and cardinalities between entities. The result of this process is an REA diagram for a single organizational function. This next section in the chapter explained how multiple REA diagrams (revenue cycle, purchases, cash disbursements, and payroll) are integrated into a global or enterprise-wide model. The enterprise model was then implemented into a relational database structure and user views were constructed. The view integration process involved three steps: (1) consolidate the individual models; (2) define primary keys, foreign keys, and attributes; and (3) construct the physical database and produce the user views.

The chapter concluded with a discussion of how REA modeling can improve competitive advantage by allowing management to focus on the value-added activities of their operations. For financial statement reporting purposes, however, many companies compromise the pure REA model by maintaining a traditional general ledger system.

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