CHAPTER-4
The REA Data Model
The REA data model prescribes a basic
pattern for how the three types of entities
(resources, events, and agents) should
relate to one another.
• Resources are things that have economic
value to the organization.
• Control, future benefits, past transaction
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• Events are the various business activities
about which management wants to collect
information for planning or control purposes.
• Purchase, Sell, Contract, order and other
• Agents includes people and organizations who
participate in events and about whom
information is desired for planning, control, and
evaluation purposes.
• May be either Internal or External.
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• Can you identify the resources in this
diagram?
Inventory Sales Employee
Customer
Cash Receive
Employee
Accounts Cash
3
• Can you identify the events in this
diagram?
Inventory Sales Employee
Customer
Cash Receive
Employee
Accounts Cash
4
• Can you identify the agents in this
diagram?
Inventory Sales Employee
Customer
Cash Receive
Employee
Accounts Cash
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Structuring relationships
The basic REA template
• Rule 1: Every event entity must be linked to
at least one resource entity.
– Events must be linked to at least one resource
that they affect.
• Some events affect the quantity of a resource
• If they increase the quantity of a resource,
they are called a “get” event.
• If they decrease the quantity of a resource
they are called a “give” event.
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Example: If you purchase inventory for
cash:
• The get event is that you receive
inventory.
• The give event is that you pay cash.
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• Rule 2: Every event entity must be
linked to at least one other event entity.
– Give and get events are linked together and form
economic duality/ Association/ Cardinlity/
relationship.
– These relationships reflect the basic business
principle that organizations engage in activities
that use up resources in hopes of acquiring other
resources in exchange.
– Each accounting cycle can be described in terms of
give-to-get economic duality relationships.
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• Rule 3: Every event entity must be
linked to at least two participating
agents.
– For accountability, organizations need to be
able to track actions of employees.(Internal)
– Also need to monitor the status of
commitments and exchanges with outside
parties.(External)
– Each event links to at least two
participating agents.
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• For events that involve transactions with external parties
– The internal agent is the employee
responsible for the affected resource.
– The external agent is the outside party to the
transaction.
• For internal events, such as transferring raw materials to
the production floor:
– The internal agent is the employee who
gives up responsibility or custody for the
resource.
– The external agent is the one who receives it.
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Developing REA diagram
• Developing an REA diagram for a specific
transaction cycle consists of three steps:
Step one: Identify the events about which
management wants to collect information.
Step two: Identify the resources affected by
the events and the agents who participated.
Step three: Determine the cardinalities
between the relationships.
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Step One: Identify Relevant Events
• At a minimum, every REA model
must include the two events that
represent the basic “give-to-get”
economic exchange performed in
that transaction cycle.
• The give event reduces one of the
organization’s resources.
• The get event increases a resource.
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• Example: Typical major activities in the
revenue cycle include:
– Take customer order
– Fill customer order
– Bill customer( Shipment of Inventory)
– Collect payment(Cash Receipt).
• The give-to-get, then, is:
– Fill customer order (often referred to as “sale”);
– Collect cash (often referred to as “cash receipt”).
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Step Two: Identify Resources and Agents
• When the relevant events have been diagrammed in
the center of the REA diagram, the resources
that are affected by those events need to
be identified.
• Involves determining:
– The resource(s) reduced by the give event.
– The resource(s) increased by the get event.
– The resources that are affected by a
commitment event.
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Step Two: Identify Resources and Agents
Take Order
• What is the
give event?
Sale
Receive
Cash
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Step Two: Identify Resources and Agents
Take Order
• What resource is
Inventory reduced by the
give event?
Sale
Receive
Cash
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Step Two: Identify Resources and Agents
Take Order
• What is the
Inventory
get event?
Sale
Receive
Cash
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Step Two: Identify Resources and Agents
Take Order
Inventory
Sale • What resource
is increased by
the get event?
Receive
Cash
Cash
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Step Two: Identify Resources and Agents
Take Order
Inventory
Sale
• Is there a
commitment
Cash
Receive event?
Cash
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Step Two: Identify Resources and Agents
Take Order
Inventory
Sale • What resource
is affected by
the
Receive commitment
Cash
Cash event?
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Step Two: Identify Resources and Agents
• The agents who participate in each
event should also be identified.
• There will always be at least one
internal agent (employee).
• In most cases, there will also be an
external agent (e.g., customer or
supplier) who participates.
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• What agents
are involved
Take Order in the sale?
Inventory
Customer
Sale
Employee
Receive
Cash
Cash
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• What agents
are involved
Take Order in the receipt
of cash?
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
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• What agents
are involved in
taking the
order? Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
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Step Three: Determine Cardinalities
of Relationships
• The final step in REA diagram for a transaction
cycle is to add information about the relationship
cardinalities.
• A cardinality describes the nature of the
relationship between two entities.
• It indicates how many instances of
one entity can be linked to a
specific instance of another entity.
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• For example, the cardinality between
the event sales and the agent
customer answers the question:
–For each sale a company
makes, how many customers
are associated with that sale?
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• Unfortunately, there is no universal
standard for diagramming cardinalities.
• In this text, we adopt the graphical
“crow’s feet” notation style because:
–It is becoming increasingly popular.
–It is used by many software design
tools.
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• Using the crow’s feet notation:
–The symbol for zero is a circle:
O
–The symbol for one is a single
stroke: |
–The symbol for many is the
crow’s foot:
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Step Three: Determine
Cardinalities of Relationships
Sale Customer
• There is typically a minimum and
maximum cardinality for each entity
participating in a relationship.
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Sale Customer
• The minimum cardinality can be
either zero or one.
• The symbols for the minimum
cardinalities are shown above in red.
30
Sale Customer
• The minimum cardinality symbol next to
customer is the symbol for one.
• This symbol means that for every occurrence
of a sale, there must be a minimum of one customer
involved. 31
Sale
Customer
• The minimum cardinality symbol next to sale is
the symbol for zero.
• This symbol means that for every customer in
the database, there must be a minimum of
zero sales. 32
Sale Customer
• The maximum cardinality can be either one or N
(many).
• The symbols for the maximum cardinalities are
shown above in red.
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Sale Customer
• The maximum cardinality symbol next to customer
is the symbol for one.
• This symbol means that for every occurrence of a
sale, there can be no more than one customer
involved.
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Sale Customer
• The maximum cardinality symbol next to sale is the
symbol for many.
• This symbol means that for every customer in the
database, there can be many sales involved.
• Obviously, a company can make multiple
sales to an individual customer. 35
*Three types of relationships
–Three types of relationships are possible
between entities.
–Relationships depend on the maximum
cardinality on each side of a relationship.
1) A one-to-one relationship (1:1) exists
when the maximum cardinality for each
entity in the relationship is one.
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Take Order
• Both
maximums are
one, so this is a
Sale one-to-one
relationship.
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2) A one-to-many (1:N) relationship-
exists when the maximum cardinality
on one side is one and the
maximum on the other side is
many.
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Sale Customer
• The maximum number of customers that can
be involved in each sale is one.
• The maximum number of sales that can be
associated with any individual customer is many.
• This is a one-to-many (1:N) relationship. 39
3) A many-to-many (M:N)
relationship exists when
the maximum on both
sides is many.
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Inventory Sale
• The maximum number of inventory items that can
be sold in one sale is many.
• The maximum number of sales that can occur for a
particular inventory item is many.
• This is a many-to-many (M:N) relationship.
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• In relationships between events and
agents:
• For each event that occurs, the cardinality
between event and agent is typically (1:1).
Example: When a sale occurs
– There is usually one and only one customer.
– There is usually one and only one
salesperson.
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Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
43
• For each agent the cardinality between agent
and event is typically (0:N).
• Example: For a particular salesperson:
• There is typically a minimum of zero sales
(allows for inclusion of a new salesperson who
has not yet made any sales).
• A salesperson can have a maximum of many
sales.
• For a particular customer:
• There is typically a minimum of zero sales (to
allow for the inclusion of prospective customers
who haven’t bought anything yet) and a
maximum of many sales. 44
Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
45
• Let’s now look at the relationship
between events and resources.
• In the cardinality between event and
resource, the minimum cardinality
is typically one, because an event
can’t occur without affecting at
least one resource.
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Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
47
• The maximum could be one or many.
–In this particular story, each sale can
involve many items of inventory, so the
maximum is many.
–However, every receipt of cash is
deposited to one and only one cash
account, so the maximum there is one.
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Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
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• In the cardinality between event and
resource, the minimum is typically
zero.
• A company can have an inventory
item for which there has never been a
sale.
• When the company’s cash account is
new, there has never been a cash
receipt deposited in it. 50
Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
51
• In the cardinality between event and
resource, the maximum is typically
many.
• Most inventory items can be
sold many times.
• The company’s cash account
can have many cash receipts.
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Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
53
• Finally, let’s look at the relationships
between events.
• When events occur in a sequence, the
minimum cardinality between the
first event and the second event is
always zero,
• Because there is a span of time when
the first event has occurred but there
are zero occurrences of the second
event. 54
Example;
• When an order is first taken, there
have been no deliveries of goods
(sale event) to the customer.
• When goods are delivered to the
customer, there is a span of time, however
brief, in which there is no cash receipt
from the customer.
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Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
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• The minimum cardinality between the
second event and the first event is
typically one,
because the second event can’t
occur without the first event having
occurred.
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Take Order Employee
Inventory
Customer
Sale
Employee
Receive
Cash Customer
Cash
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• An exception could occur if the first
event is not required for the second
event to occur.
• Example: If a sale can be made
without first taking an order, then
the minimum cardinality between
sale and take order could be zero.
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End of the
Course!!!
Thank you!!!!!!!!
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