Representation and Patterns: An Introduction to the REA Enterprise Ontology

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Representation and Patterns An Introduction to
the REA Enterprise Ontology

• Chapter 2

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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

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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?

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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

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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

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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. 321. 1-16.
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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

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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?
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How might we represent the for relationship at
the token level??
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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

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Script Patterns

• Script patterns involve pattern-based thinking
  applied to sequential activities

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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

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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

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Frankies Dad

• Doesnt think Frankies idea is good because
• Frankie has no money
• Frankie has no time to sort and assemble cards

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Frankies Aunt Frances

• Willing to lend some of it to Frankie
• Will charge interest to make it a real business
  transaction

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Frankies Sister Sally

• Willing to work for Frankie for 2 cents per
  assembled card

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Frankies Friends

• Willing to pay fairly high prices to get the
  cards they want and willing to pay cash
• Many more potential customers

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Frankies Dad Reaction

• Will be the supplier since Frankie doesnt 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

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And then...At the End of the 3 Months

• Total revenue generated is 400.
• Repays Aunt Frances 180 and 4.50 in interest

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What was Frankies profit?
Net Sales 400.00 - COGS 165.60 Gross
Margin 234.40 - Interest Expense
4.50 Net Income 229.90
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Frankies 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
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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

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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

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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

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Value System Level

• Places the enterprise in the context of its
  resource exchanges with external business partners

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Value Chain Level

• Illustrates the enterprises internal business
  processes and the resource flows between them

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Business Process Level

• Entities
• Resources
• Economic Events
• Agents (internal and external)
• Relationships
• Stockflow
• Duality
• Control

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The Original REA ModelMcCarthy (1982)
Business Process Level
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Business Process Level (alternative notation)
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Database Tables Derived From Business Process
Level
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Task Level

• May be depicted in various formats

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Example System Flowchart
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Example Data Flow Diagram
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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