Representation and Patterns: An Introduction to the REA Enterprise Ontology

1. Representation and Patterns: An Introduction to the REA Enterprise Ontology Chapter 2

2. Chapter Learning Objectives • Explain the importance of representation and modeling in enterprise system design and use • Identify various types of patterns and recognize patterns in the world around you • Describe the purpose and the components of the four levels of the REA ontology • Describe the usefulness of the REA pattern as a framework for database design

3. Representation • Depiction of Reality with Symbols • People are real things • Identification cards represent people • i.e., identification cards are symbols that represent those people • Can you think of other representations of people? • Which of these is likely to be the best representation? • Computers are real things • What are some representations of computers? • Which of these is likely to be the best representation?

4. Models as Representations • What is a model? • A model is a simplification of something in reality • Created for a specific purpose • Hides details that are not needed for that purpose • Models of enterprise systems • Help us better understand the system we are developing • Most enterprise systems are too large and complex for the average person to comprehend in entirety

5. Principles of Modeling • What makes “good” models? • Resemble their underlying reality as completely as possible • Can be expressed at different levels of precision • Can be broken down into smaller pieces and/or aggregated

6. REALITY Representation at the type level uses one symbol for multiple instances of a specified type green red Color blue yellow Representation at the token level has a separate symbol for each specific instance in reality purple Symbol Representations at Different Levels of Abstraction Token level SYMBOL Type level SYMBOL Source: Professor Bill McCarthy at Michigan State University;based on Geerts and McCarthy, “An Ontological Analysis of the Economic Primitives of the Extended-REA Enterprise Information Architecture” International Journal of Accounting Information Systems. 3:21. 1-16.

7. Are the objects below symbols or reality? Are they “token” or “type” level objects? Can you match the left-side objects to the corresponding right-side objects? • Victoria Memorial Hall • Lincoln Memorial • Mount Rushmore

8. Queen George Theodore Abraham Thomas Victoria Washington Roosevelt Lincoln Jefferson Are these objects symbols or reality? Are they “token” or “type” level objects?Can you match these objects to those on the previous slide?

9. death birth location name yr finished name Famous Person Landmark for Landmark Famous Person How might we represent the “for” relationship at the token level??

10. Landmark Famous Person Landmark For Famous Person

11. Object Patterns • “Stereotypical constellation of entities” • a group of entities and relationships between them that we expect to exist in the underlying reality • At the business process level, REA is such a pattern

12. Script Patterns • Script patterns involve “pattern-based thinking” applied to sequential activities

13. Business-Entrepreneur Script • Get money • Engage in value-added exchanges • Purchase raw materials • Purchase labor • Manufacture finished goods • Sell finished goods • Pay back money and live off profit

14. Meet Frankie • 10-year old entrepreneur • Big fan of sports trading cards • Great idea for making money • Buy cards in bulk • Buy sleeves in bulk • Put cards in sleeves • Sell single sleeved cards at a profit to other sports trading card fans

15. Frankie’s Dad • Doesn’t think Frankie’s idea is good because • Frankie has no money • Frankie has no time to sort and assemble cards

16. Frankie’s Aunt Frances • Willing to lend some of it to Frankie • Will charge interest to make it a “real” business transaction

17. Frankie’s Sister Sally • Willing to work for Frankie for 2 cents per assembled card

18. Frankie’s Friends • Willing to pay fairly high prices to get the cards they want and willing to pay cash • Many more potential customers

19. Frankie’s Dad Reaction • Will be the supplier since Frankie doesn’t have a credit card. • Cards will cost $3 per pack if he buys 24 packs at a time. Sleeves will cost $7.50 for a box of 250. Those costs include shipping and sales tax. • Must pay for the cards as soon as they arrive. • Must pay Sally as soon as she does her work, not after the cards are sold

20. And then...At the End of the 3 Months • Total revenue generated is $400. • Repays Aunt Frances $180 and $4.50 in interest

21. What was Frankie’s profit? Net Sales = $400.00 - COGS $165.60 = Gross Margin $234.40 - Interest Expense $ 4.50 = Net Income $229.90

22. Frankie’s Ending Balance Sheet Assets Cash $227.86 Inventory $ 2.04 Total Assets $229.90 Liabilities and Owners’ Equity Liabilities $ 0.00 Retained Earnings $229.90 Total Liabilities & Equity $229.90

23. Scripts and the REA Ontology • The value chain is a sequence of scenes • Each is a business process • Each represents a pattern • The REA ontology is a combination of script patterns and object patterns to assist modeling enterprises

24. Enterprise Ontologies • What is an “ontology”? • An attempt to define what things exist in the world in general; a branch of metaphysics dealing with the nature of being • What is an “enterprise ontology”? • An attempt to define what kinds of things in enterprises need to be represented

25. REA Ontology Levels • Value System Level (object-based pattern) • Examines enterprise in context of its external business partners • Value Chain Level (script-based pattern) • Connects business processes via resource flows between processes • Business Process Level (object-based pattern) • Task Level (script-based pattern) • Many different possible scripts exist

26. Value System Level Places the enterprise in the context of its resource exchanges with external business partners

27. Value Chain Level Illustrates the enterprise’s internal business processes and the resource flows between them

28. Business Process Level • Entities • Resources • Economic Events • Agents (internal and external) • Relationships • Stockflow • Duality • Control

29. The Original REA ModelMcCarthy (1982) Business Process Level

30. Business Process Level (alternative notation)

31. Database Tables Derived From Business Process Level

32. Task 1 Task 5 Task 2 Task 6 Task 3 Task 7 Task 4 Task 8 Task Level • May be depicted in various formats

33. Example System Flowchart

34. Inventory data Customer data Order 1.1.1 Receive order data from customer Order 1.1.2 Check customer status Customer credit status 1.1.3 Check inventory availability Inventory availability Approved Order Approved Order 1.1.4 Record order data Customer order data Example Data Flow Diagram

35. Summary • Modeling is a useful tool for minimizing complexity and enabling us to develop enterprise wide system solutions • Good models use symbols that represent reality as closely as possible • Object Patterns are stereotypical constellations of things and relationships between them • Script Patterns are stereotypical sequences of events, and can be thought of in terms of scenes, actors, props, and roles • A combination of object and script patterns can be used to model enterprise systems • the REA Enterprise Ontology provides such an approach, modeling enterprises at the value system, value chain, business process, and task levels