An REA Model of an Economic Exchange
William E. McCarthy*Michigan State University
*http://www.msu.edu/user/mccarth4/
Cookie-Monster (the customer) and Elmo (the entrepreneur) meet in the (real or virtual) marketplace, thus setting the
stage for an Economic Exchange
EconomicEvent
EconomicAgent
EconomicResource
duality
Source:
W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting Systems in a Shared Data Environment,” The Accounting Review, July 1982, pp 554-78.
W.E. McCarthy “The REA Modeling Approach to Teaching Accounting Information Systems,” Issues in Accounting Education, November 2003, pp. 427-41.
Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in a
SHIPMENT (transfer of Cookie Inventory)
Give
Take
Economic Resource
inside participatio
n
outside participatio
n
outside participatio
n
inside participatio
n
stock-flow
stock-flow
Economic Event
Economic Agent
Economic Agent
Economic Agent
Economic Agent
Economic Resource
duality
Economic Event
REA model of cookie sale from entrepreneur’s (ELMO) perspective
Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in
a PAYMENT (transfer of Cash)
Give
Take
Economic Resource
inside participatio
n
outside participatio
n
outside participatio
n
inside participatio
n
stock-flow
stock-flow
Economic Event
Economic Agent
Economic Agent
Economic Agent
Economic Agent
Economic Resource
duality
Economic Event
REA model of cookie sale from entrepreneur’s (ELMO) perspective
Give
Take
Economic Resource
inside participatio
n
outside participatio
n
outside participatio
n
inside participatio
n
stock-flow
stock-flow
Economic Event
Cash Receipt
Economic Agent
Salesperson
Economic Agent
Customer
Economic Agent
Customer
Economic Agent
Cashier
Cash
Economic Resource
Cookies
duality
Economic Event
Sale
more general exchange model from the entrepreneur’s (ELMO’s) internal perspective
Product#
Description
Price
QOH
P-1 Chocolate Chip
1.05 200
P-2 Chocolate .95 205
P-3 Peanut Butter
1.00 97
P-4 Pecan 1.10 257
Invoice#
Receipt Timestam
p
Amount Applied
I-1 2JUL0830 14.75
I-2 3JUL0800 2.00
I-2 5JUL0800 18.00
I-3 8JUL1145 9.90
I-4 8JUL1145 9.20
Invoice# Dollar Amoun
t
Date
Salesperson
Employee#
Customer #
I-1 14.75 1JUL E-1234 C-987
I-2 20.00 2JUL E-1235 C-888
I-3 9.90 3JUL E-1236 C-999
I-4 9.20 5JUL E-1237 C-999
Product# Invoice# Quantity
P-2 I-1 5
P-3 I-1 10
P-3 I-2 20
P-4 I-3 9
P-1 I-4 4
P-3 I-4 5
COOKIES
SALE
COOKIES-stockflow-SALE
SALE-duality-CASH_RECEIPT
Partial Database for Elmo’s Cookie Business
Why is this invoice amount $14.75 ??How is customer paying for
this ???
A business process is a set of activities that takes one or more kinds of input and creates an output that is of
greater value to the customer (Hammer and Champy)
A value chain is a purposeful network of business processes aimed at assembling the individual components of a final product (i.e., its portfolio of attributes) of value
to the customer (Porter and Geerts/McCarthy)
Part of ELMO’s Value Chain for Providing Cookies
cookie ingredient
s
Acquisition Cycle
cash
business process
labor
cookiesConversion Cycle
business process
Revenue Cycle
cash
business process
value chain
Different perspectives on REA modeling needed for enterprise modeling (value chains) and collaboration space (supply
chains)• Enterprise modeling (as evidenced in normal ERP systems) is
done from the perspective of one company or entrepreneur. Business processes are viewed as components of a single value chain. A single exchange (like the sale of a product for money) would be modeled twice, once in the enterprise system of each trading partner.
• Collaboration space modeling (as evidenced in ebXML or ISO Open-edi) is done from a perspective independent of each trading partner. A single exchange is modeled once in independent terms that can be then mapped into internal enterprise system components. Supply chains are networks of business processes that alternate internal transformations and external exchanges (definition due to Bob Haugen).
• REA modeling works in both cases and the independent to trading partner mapping is absolutely straightforward and completely defined.
BusinessProcess
BusinessProcess
BusinessProcess
BusinessProcess
BusinessProcess
BusinessProcess
Independent view of Inter-enterprise events
Enterprise
Enterprise
Enterprise
BusinessProcess
BusinessProcess
BusinessProcess
Illustration of Perspective: Trading Partner vs. Independent
Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers)
Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies
SOURCE: Adapted from ISO 15944-4, K. Morita
Used for collaboration space modeling
initiating transfer
Economic Resource
participatio
n
participatio
n
participatio
n
participatio
n
stock-flow
stock-flow
Economic Event
Economic Agent
Economic Agent
Economic Agent
Economic Agent
Economic Resource
duality
Economic Event
REA model of cookie sale from independent (collaboration space) perspective
responding transfer
Cookie-Monster and Elmo after their economic exchange (both economic
agents have now reached higher levels of utility)
Cookie Monster and Elmo are of course characters from the Public Broadcasting Service TV show Sesame Street*. Their use here is only illustrative. Cookie Monster is a great example of a typical buyer (has money, wants goods) because he is most happy when he has a cookie to eat. The use of Elmo as a typical seller (has goods, wants money) is only a convenient illustration. The Cookie Monster shown was a favorite toy of my daughter Meghan. The Elmo was bought for me by my wife Jane.
* see http://www.sesameworkshop.org
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