Chapter 3

Accounting Information
Systems Applications
Dr. Messele Getachew
CONTENTS
 Revenue Cycle
 Expenditure Cycle
 Production Cycle
 Human Resources Management and Payroll Cycle
 Database Design Using the REA Data Model

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1 REVENUE CYCLE: SALES TO CASH COLLECTIONS
 Revenue Cycle
The revenue cycle is a recurring set of
business activities and related information
processing operations associated with providing
goods and services to customers and collecting
cash in payment for those sales.
The revenue cycle’s primary objective is to
provide the right product in the right place at the
right time for the right price.

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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
• Basic Revenue Cycle Activities

• Sales order entry

 Shipping

 Billing

 Cash Collections

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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
• Sales Order Entry Processing Steps

• Take the customer order

▫ Source document: sales order

• Approve customer credit

• Check inventory availability

• Respond to customer inquiries

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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
• Sales Order Entry Processing
Threats Controls

1.Incomplete/inaccurate 1 a. Data entry edit controls

orders b. Restrict access to master data to
2.Invalid orders maintain accuracy
3.Uncollectible accounts 2 a. Signature to authorize sale
3 a. Credit limits checked and if sale
4.Stock-outs and excess
exceeds limit, specific authorization
inventory
needed
5.Loss of customers
4 a. Perpetual inventory system
b. RFID or bar code technology
c. Physical inventory counts
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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
• Shipping Process

• Pick and pack the order

 Source documents: picking ticket

• Ship the order

 Source documents: Packing slip, Bill of lading

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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
 Shipping Process
Threats Controls

1.Picking wrong item or 1 a. Bar code technology

quantity to ship b. Reconcile picking list to sales order
2 a. Restrict physical access to inventory
2.Theft
b. Document inventory transfers
3.Fail to ship the goods
c. Physical counts of inventory and
4.Ship to wrong address reconcile to quantities recorded
3 a. Reconcile shipping documents to sales
orders, picking lists, and packing slips
4 a. Data entry edit controls
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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
 Billing Process
• Invoicing the customer
 Source document: sales invoice

• Updating accounts receivable

 Source document: credit memo and monthly statements

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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
 Billing Process Controls

Threats
1 a. Reconcile invoices with sales orders and
shipping documents.
1.Failure to bill customer
b. Separate shipping and billing functions.
2.Billing errors
2 a. Data entry edit controls.
3.Posting errors in accounts b. Configure system for automatically enter
receivable price data.

4.Inaccurate or invalid credit 3 a. Reconcile subsidiary accounts receivable

balance to the amount for accounts
memos receivable in the general ledger.
4 a. Segregation of authorization and
recording function for credit memos.
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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
 Cash Collection Process
• Process customer payment and update their account
balance
 Remittance

• Deposit payments to the bank

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 1 REVENUE CYCLE: SALES TO CASH
COLLECTIONS
 Cash Collection Process
Threats Control

1. Theft of cash 1 a. Proper segregation of cash handling and

2. Cash flow problems posting to customer accounts, authorize
credit memos, or reconcile bank
account.
b. Use lockbox
c. Deposit all cash receipts daily
2 a. Lockbox
b. Discounts for early payment
c. Cash flow budgeting
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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
• Basic Expenditure Cycle Activities

• Order materials, supplies, and services

• Receive materials, supplies, and services

• Approve supplier (vendor) invoice

• Cash disbursement

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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
• Order Goods (Materials/Supplies) or Services Processing Steps

• Identify what, when, and how much to purchase

 Source document: purchase requisition

• Choose a supplier

 Source document: purchase order

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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
 Ordering Goods/Services Control

Threats

1 a. Perpetual inventory system

1. Stockouts and excess inventory b. Bar-coding, RFID
2 a. Review and approval of
2. Purchasing items not needed purchase requisitions
3. Purchasing items at inflated prices 3 a. Price lists
b. Competitive bids
4. Purchasing goods of poor quality 4 a. Use approved suppliers
5. Unreliable suppliers 5 a. Monitor supplier
performance
6. Purchasing from unauthorized b. Require quality certification
suppliers 6 a. Purchase from approved
7. Kickbacks suppliers
7 a. Supplier audits
b. Prohibit gifts
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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
• Receiving Process

 Goods arrive

• Verify goods ordered against the purchase order

(what, how much, quality)

• Source document: receiving report

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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
 Receiving Goods or Services
Threats Control

1. Accepting unordered items 1 a. Authorized purchase orders

2. Mistakes in counting needed before receiving goods
3. Verifying receipt of services 2 a. Bar codes or RFID
3 a. Budget controls and audits
4. Inventory theft
4 a. Restrict physical access to
inventory
b. Document all inventory
transfers
c. Segregate custody vs. receiving
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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
• Approve Supplier Invoice and Cash Disbursements
 Match the supplier invoice to:
▫ Purchase order
▫ Receiving report
supplier invoice + purchase order + receiving report = voucher

 Approve supplier invoice for payment

▫ Source document: disbursement voucher

 Pay vendor

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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
 Approve Supplier Invoice
Threats Control

1. Errors in supplier invoice 1 a. Verify invoice accuracy

2. Mistakes in posting to 2 a. Data entry edit controls
accounts payable
b. Reconcile detailed accounts
payable records to the
general ledger accounts
payable account

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 2 EXPENDITURE CYCLE: PURCHASING TO CASH
DISBURSEMENTS
 Cash Disbursements
Threats Control

1 a. File invoices by due date to take advantage of

1. Failure to take discounts discounts
2. Pay for items not 2 a. Match supplier invoice to supporting
received documents (purchase order, receiving
report)
3. Duplicate payments 3 a. Pay only original invoices
4. Theft of cash b. Cancel supporting document when payment
is made
5. Check alteration 4 a. Physical security of checks
b. Separation of duties
6. Cash flow problems
c. Reconcile bank accounts
5 a. Check Protection machines
DR. MESSELE GETACHEW
6 a. Cash flow budget
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 3 PRODUCTION CYCLE
• Production Cycle Process
 Product Design
▫ Source documents: bill of materials and operations list

Planning and Scheduling

▫ Source documents: Master production schedule,
production order, and materials requisition

 Production Operations
 Cost Accounting
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 3 PRODUCTION CYCLE
• Production Cycle Process

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 3 PRODUCTION CYCLE
1. Product Design
2. Planning and Scheduling
Threats Control

1. Poor product design resulting 1 a. Analysis of costs arising from

in excess costs product design choices
2. Over and under production b. Analysis of warranty and repair
costs
2 a. Production planning systems
b. Review and approve production
orders and schedules
c. Restrict access to orders and
schedules
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 3 PRODUCTION CYCLE
3. Production Operations
Threats Control

1. Inventory theft 1 a. Restrict physical access

2. Fixed asset theft b. Document movement of inventory
c. Segregation of custody duties from
3. Poor performance
authorization and recording
4. Sub-optimal investments in fixed 2 a. Restrict access to fixed assets
assets
b. Keep detailed records of fixed
5. Loss of inventory or fixed assets assets including disposals
due to fire or disasters 3 a. Performance reporting
6. Disruption of operations 4 a. Solicit competitive bids
5 a. Insurance and physical safeguards
6 a. Backup and disaster recovery plans
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 3 PRODUCTION CYCLE
4. Cost Accounting
Threats Control

1. Inaccurate cost data 1 a. Source data automation

2. Inappropriate allocation of b. Data processing integrity
overhead costs controls
3. Misleading reports 2 a. Time-driven activity-based
costing
3 a. Performance metrics

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 3 PRODUCTION CYCLE
• Cost Accounting Systems

Provide information for planning, controlling, and

evaluating the performance of production operations.

Provide accurate cost data about products for use in

pricing and product mix decisions.

Collect and process the information used to calculate

the inventory and cost of goods sold values that
appear in organization’s financials.

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 4 HUMAN RESOURCES MANAGEMENT AND
PAYROLL CYCLE
• Human Resource Management Process

• Recruit and hire new employees

• Training
• Job assignment
• Compensation (payroll)
• Performance evaluation
• Discharge of employees
(voluntary or involuntary)

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 4 HUMAN RESOURCES MANAGEMENT AND
PAYROLL CYCLE
• Payroll Cycle Activities

• Update payroll master data

• Validate time and attendance data
Source document: time sheets
• Prepare payroll
Payroll register and deduction register
• Disburse payroll
• Disburse taxes and miscellaneous
deductions
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 4 HUMAN RESOURCES MANAGEMENT AND
PAYROLL CYCLE
1. Update Master Payroll Data
2. Validate Time and Attendance Data
3. Prepare Payroll
Threats Control

1. Unauthorized changes to payroll 1 a. Access controls and segregation of

master data duties
2. Inaccurate updating of master data 2 a. Data processing integrity controls
3. Inaccurate time and attendance data 3 a. Supervisory review
4. Errors in processing payroll b. Source data automation for data
capture
4 a. Data processing integrity controls
b. Supervisory review
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 4 HUMAN RESOURCES MANAGEMENT AND
PAYROLL CYCLE
4. Disburse Payroll
5. Disburse Payroll Taxes
Threats Control

1. Theft or fraudulent distribution of 1 a. Restrict access to blank payroll

paychecks checks and check signing machine

2. Failure to make required payments b. Use separate account (imprest

fund)
3. Untimely payments
2 a. Configure system to make
4. Inaccurate payments automatic payments on time
3 a. Configure system to make
automatic payments on time
4 a. Process integrity controls
b. Supervisory review
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 4 HUMAN RESOURCES MANAGEMENT AND
PAYROLL CYCLE
• Reasons to Outsource Payroll

• Reduce costs
Cost of processing and minimize errors

• Broader range of benefits

Administration of benefits

• Free up computer resources

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Database Design Using the
resources, events, and agents
REA Data Model
 INTRODUCTION

Questions to be addressed in this chapter include:

• What steps are followed to design and

implement a database system.
• How is the REA data model used to design an
AIS database?
• How is an entity-relationship (E-R) diagram of
an AIS database drawn?

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 INTRODUCTION
• Steps in database design include the following:
• Planning

• Initial planning to determine the

need for and feasibility of developing
a new system.
• Includes preliminary judgments
about technological and economic
feasibility.

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 INTRODUCTION
• Steps in database design include the following:
• Planning
• Requirements analysis

• Identifying user information needs

• Defining scope of proposed system.
• Using information about the expected number
of users and transaction volume to make
preliminary decisions on hardware and
software requirements.

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 INTRODUCTION
• Steps in database design include the following:
• Planning
• Requirements analysis
• Design

• Developing different schemas for the

new system at the conceptual, external,
and internal levels.

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 INTRODUCTION
• Steps in database design include the following:
• Planning
• Requirements analysis
• Design
• Coding

• Translating the internal-level schema into

the actual database structures that will be
implemented in the new system.
• Developing new applications.
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 INTRODUCTION
• Steps in database design include the following:
• Planning
• Requirements analysis
• Design
• Coding
• Implementation

• Transferring data from existing systems

to the new database.
• Testing the new system.
• Training employees.
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 INTRODUCTION
• Steps in database design include the following:
• Planning
• Requirements analysis
• Design
• Coding
• Implementation
• Operation and maintenance

• Using and maintaining the new system.

• Monitoring system performance and user
satisfaction to determine need for enhancements
DR. MESSELE GETACHEW 39
Tuesday, February 11, 20
and modifications. 25
 INTRODUCTION
• Steps in database design include the following:

• Planning
• Requirements analysis
• Design
• Coding
• Implementation
• Operation and maintenance
• Eventually, changes in business strategy and
practices or new IT developments lead to the need for
a new system and the process starts over.
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INTRODUCTION
 Accountants can and should participate in all stages of the database design

process, although participation varies between stages.

 Accountants may participate during both requirements analysis and design
stage
 Our focus in this chapter is to see how to design data base and implement
data base by using REA data model

There are two important tools to facilitate data

modeling or designing:
• Entity-relationship diagramming
• Resources, Events, and Agents (REA) data
model
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INTRODUCTION
• Two important tools to facilitate data modeling:

• Entity-relationship diagramming
• REA data model

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 ENTITY-RELATIONSHIP DIAGRAMS
• An entity-relationship (E-R) diagram is
a graphical technique for portraying a
database schema.
• Shows the various entities being
modeled and the important
relationships among them in the form
of graph.

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 ENTITY-RELATIONSHIP DIAGRAMS
• In an E-R diagram, entities are depicted as rectangles.
• But there are no industry standards for other aspects
of these diagrams.

Enrollment Students

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 ENTITY-RELATIONSHIP DIAGRAMS
• Some data modelers, tools, and authors use diamonds to depict relationships.

Line
Enrollment Items Students

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 ENTITY-RELATIONSHIP DIAGRAMS
• Others do not use diamonds.

Enrollment Students

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ENTITY-RELATIONSHIP DIAGRAMS
• Sometimes the attributes associated with each entity
are depicted as named ovals connected to each
rectangle
Student
Enrollment Student Name
Number Enrollment ID No.
Date
Student
Address
Enrollment
Time

Enrollment Students

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 ENTITY-RELATIONSHIP DIAGRAMS
• Sometimes these attributes are listed in a separate table.

Enrollment Students

Entity Name Attributes

Enrollment Enrollment No., Enrollment Date, Enrollment Time
Student Student ID No., Student Name, Student Address
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ENTITY-RELATIONSHIP DIAGRAMS
• E-R diagrams can be used to represent the
contents of any kind of databases.
• Our focus is on databases designed to
support an organization’s business
activities.
• The diagrams we develop depict the
contents of a database and graphically
model those business processes.
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ENTITY-RELATIONSHIP DIAGRAMS

• E-R diagrams can include many different

kinds of entities and relationships.
• An important step in designing a database
is deciding which entities need to be
modeled or included in database.
• The REA data model is useful for this
decision.
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INTRODUCTION
• Two important tools to facilitate data modeling:

• Entity-relationship diagramming
• REA data model

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 THE REA DATA MODEL
• The REA data model was developed specifically for use in designing accounting information
systems.

• It Provides guidance for:

• Identifying the entities to be included in a
database.
• Structuring the relationships among the
entities.
• REA data models are usually depicted in the form of E-R diagrams.
• Therefore, we refer to E-R diagrams developed with the REA model as REA diagrams.

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 THE REA DATA MODEL
• Three Basic Types of Entities

• The REA data model is so named because it

classifies entities into three distinct
categories:
• Resources that the organization acquires
and uses.
• Resources are things that have
economic value to the
organization.
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THE REA DATA MODEL
• Three Basic Types of Entities
• The REA data model is so named because it classifies entities into three distinct
categories:

• Resources that the organization acquires and

uses.
• Events in which the organization engages

• These are the various business activities

about which management wants to
collect information for planning or
control purposes.
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THE REA DATA MODEL
• Three Basic Types of Entities
• The REA data model is so named because it classifies entities into three distinct
categories:

• Resources that the organization acquires and

uses.
• Events in which the organization engages
• Agents participating in these events
• Includes people and organizations who
participate in events and about whom
information is desired for planning,
control, and evaluation purposes.
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 THE REA DATA MODEL
• Can you identify the resources in this diagram?.

Inventory Sales Employee

Customer

Cash Receive
Employee
Accounts Cash
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 THE REA DATA MODEL
• Can you identify the resources in this diagram?.

Inventory Employee
Sales

Customer

Cash Receive
Employee
Accounts Cash
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 THE REA DATA MODEL
• Can you identify the events in this diagram?.

Inventory Sales Employee

Customer

Cash Receive
Employee
Accounts Cash
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 THE REA DATA MODEL
• Can you identify the events in this diagram?.

Inventory Sales Employee

Customer

Cash Receive
Employee
Accounts Cash
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 THE REA DATA MODEL
• Can you identify the agents in this diagram?.

Inventory Sales Employee

Customer

Cash Receive
Employee
Accounts Cash
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 THE REA DATA MODEL
• Can you identify the agents in this diagram?.

Inventory Sales Employee

Cash Receive
Accounts Cash
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RULES FOR STRUCTURAL
RELATIONSHIPS:

The REA data model prescribes a

basic pattern for how the three types
of entities (resources, events, and
agents) should relate to one another.
• Rule 1: Each event is linked to at
least one resource that it affects.

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 THE REA DATA MODEL

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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THE REA DATA MODEL
 EXAMPLE: If you purchase inventory
for cash:
• The get event is that you receive
inventory.
• The give event is that you pay cash.
Relationships that affect the quantity of
a resource are sometimes referred to as
stock flow relationships.

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THE REA DATA MODEL
Rule 1: Each event is linked to at
least one resource that it affects.

Resource A Event A

Inventory sales
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THE REA DATA MODEL
Rule 2: Each event is linked to at least one other
event.
• Give and get events are linked together in what is
labeled an economic duality 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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THE REA DATA MODEL
• In some conditions not every relationship
between two events represents a give-to-get
economic duality.
• Commitment events are linked to other events
to reflect sequential cause-effect
relationships.
• Example:

• Take customer order (commitment) leads to:

• Deliver inventory (give event) and receive
cash (get event).
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THE REA DATA MODEL
Rule 2: Each event is linked to at least
one other event.

Resource A Event A

Resource B Event B
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THE REA DATA MODEL
• 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.
• Also need to monitor the status of
commitments and exchanges with
outside parties.
• Each event links to at least two
participating agents.
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THE REA DATA MODEL
Rule 3: Each event is linked to at
least two agents.

Resource A Event A Agent A

Agent B

Resource B Event B Agent C

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DEVELOPING AN 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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 DEVELOPING AN 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.
• Let’s walk through an example.

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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.
• There are usually other events that management is
interested in planning, controlling, and monitoring.
These should be included in the model.

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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle
include:
• Take customer order
• Fill customer order
• Bill customer
• Collect payment

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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:
• Take customer order
• Taking the customer
• Fill customer order order does not
• Bill customer involve giving or
taking a resource. It
• Collect payment is a commitment
event.

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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:

• Take customer order

• Fill customer order Filling the order
• Bill customer involves a reduction
in the company’s
• Collect payment
inventory. It is a
give event.

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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:

• Take customer order

• Fill customer order
• Bill customer Billing customers
• Collect payment involves the exchange
of information with an
external party but does
not affect resources.

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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:

• Take customer order

• Fill customer order
• Bill customer
• Collect payment • Collecting payment
results in an increase in
cash. It is a get
event.
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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:

• Take customer order

• Fill customer order
• Bill customer • The give-to-get, then, is:
– Fill customer order
• Collect payment
(often referred to as
“sale”);
– Collect cash (often
referred to as “cash
receipt”).
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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:

• Take customer order

• Taking an order
• Fill customer order requires that we set
resources aside.
• Bill customer
• That information
• Collect payment also should be
included in our
model.

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 STEP ONE: IDENTIFY RELEVANT EVENTS
• Example: Typical activities in the revenue cycle include:

• Take customer order • Printing and mailing

• Fill customer order invoices does not
directly affect an
• Bill customer economic resource.
• Collect payment • Does not need to
be included in the
model.

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STEP ONE: IDENTIFY RELEVANT
EVENTS
• In completing the first step of an REA
diagram, the event entities are typically
drawn from top to bottom in the sequence
in which they normally occur.

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25
STEP ONE: IDENTIFY RELEVANT EVENTS

Take Order

Sale

Receive
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 83
25
 DEVELOPING AN 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.
• Let’s walk through an example.

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25
 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
Sale event?

Receive
Cash
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25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS

Take Order

Inventory
• What resource
is reduced by
Sale
the give
event?

Receive
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 87
25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS

Take Order

• What is the
Inventory
get event?

Sale

Receive
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 88
25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS

Take Order

Inventory

Sale
• What resource
is increased by
the get event?
Receive
Cash
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 89
25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS

Take Order

Inventory

Sale • Is there a
commitme
nt event?
Receive
Cash
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 90
25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS

Take Order

Inventory

Sale
• What resource
is affected by
the commitment
Receive
Cash event?
Cash
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25
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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25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS • What agents
are involved
Take Order in the sale?

Inventory
Customer

Sale

Employee

Receive
Cash
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 93
25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS • What agents are
involved in the
Take Order receipt of cash?

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 94
25
STEP TWO: IDENTIFY RESOURCES AND
AGENTS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 95
25
 DEVELOPING AN 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.
• Let’s walk through an example.

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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• The final step in an 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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 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• Unfortunately, there is no universal standard for diagramming cardinalities.

 We adopt and illustrate 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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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• Using the crow’s feet notation:
• The symbol for zero is a circle: O

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 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• Using the crow’s feet notation:
• The symbol for zero is a circle: O
• The symbol for one is a single stroke: |

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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• 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
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?
Sale Customer

• There is typically a minimum

and maximum cardinality for
each entity participating in a
relationship.

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STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Sale Customer

• The minimum cardinality can

be either 0 or 1.
• The symbols for the minimum
cardinalities are shown above
in red.
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25
STEP THREE: DETERMINE
CARDINALITIES OF RELATIONSHIPS

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.
involved
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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

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. This minimum of zero
allows the company to add a customer to its database before
any sales have been made to that customer, i.e., a prospective
customer can be included.
DR. MESSELE GETACHEW Tuesday, February 11, 20
25
105
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Sale Customer

• The maximum cardinality can

be either 1 or N (many).
• The symbols for the maximum
cardinalities are shown above
in red.
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STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

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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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

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.
DR. MESSELE GETACHEW Tuesday, February 11, 20
25
108
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
Three Types of Relationships
Relationships depend on the maximum cardinality on
each side of a relationship.
A one-to-one relationship (1:1) exists when the
maximum cardinality for each entity in the
relationship is 1.
A one-to-many (1:N) relationship exists when the
maximum cardinality on one side is 1 and the
maximum on the other side is many.
A many-to-many (M:N) relationship exists when the
maximum on both sides is many.
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 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• It is not a “one size fits all” world for relationships and
cardinalities.
• The cardinalities between two entities can vary based on
how the particular company does business.
• In other words, the choice of cardinalities is not
arbitrary.
• It reflects facts about the organization that are obtained
during the requirements definition stage of the database
design process.

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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• Now let’s go back to the REA diagram
for the revenue cycle and see if we can
complete the cardinalities.

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STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 112
25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
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.
This practice makes it more feasible for the
organization to establish employee
accountability for the event.
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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 114
25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
 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.
 Or: 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.
DR. MESSELE GETACHEW Tuesday, February 11, 20 115
25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• 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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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 118
25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
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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STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• In the cardinality between resource and event, 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.

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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
• In the cardinality between resource and event, 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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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
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25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
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.
 Examples:
 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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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 126
25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

• 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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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 128
25
 STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS
 The maximums in the cardinalities between events can be either one or many, and these
maximums vary based on business practices.

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25
STEP THREE: DETERMINE CARDINALITIES OF
RELATIONSHIPS

Take Order Employee

Inventory
Customer

Sale

Employee

Receive
Cash Customer
Cash
DR. MESSELE GETACHEW Tuesday, February 11, 20 130
25
 End of chapter 3

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25