Chapter 1

1. Chapter 1 Business Processes, Data Modeling and Information Systems

2. 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

3. 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

4. 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

5. 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.

6. 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.”

7. 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.

8. REA Diagram • 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.

9. Basic Economic Events in Transaction Cycles

10. 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.

11. Overall REA Model for an AIS

12. REA: Revenue and Expenditure Cycles

13. Relationships between Entities

14. 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.

15. Person-Height Example

16. Professor-Course Example

17. Using REA to Model Business Processes • Three basic steps to construct an REA diagram to depict a company’s business processes: • Identify economic exchange events. • Identify the resources affected by each economic event and the agents who participate in those events. • 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.

18. Sales-Cash Receipt Relationship (E-E) Identify economic exchange events in the cycle

19. Basic REA Diagram for Cherokee’s Revenue Cycle Identify the resources affected by each economic event and the agents who participate in those events Agents Resource Events

20. Cash-Cash Receipt Relationship (R-E) Determine the cardinalities of each relationship

21. Inventory-Sales Relationship (R-E)

22. Sales-Cash Receipt Relationship (E-E, without accounts receivable)

23. Sales-Cash Receipt Relationship (E-E, with accounts receivable)

24. Complete REA Diagram for Cherokee’s Revenue Cycle

25. Purchase-Cash Disbursement Relationship (E-E) Identify economic exchange events in the cycle

26. Basic REA Diagram for Cherokee’s Expenditure Cycle Identify the resources affected by each economic event and the agents who participate in those events Agent Resource Event

27. Cash-Cash Disbursement Relationship (R-E) Determine the cardinalities of each relationship

28. Inventory-Purchase Relationship (R-E)

29. Purchase-Cash Disbursement Relationship E-E, with accounts payable

30. Complete REA Diagram for Cherokee’s Expenditure Cycle

31. Comprehensive REA Data Model for Cherokee Art and Antique Store

32. End of Chapter 1