Enhancing Knowledge Integration with REA Modeling in an AIS Project

1. INTRODUCTION The ability to document information systems and process mapping are important skills, and are critical to understanding the accounting system and its controls. In this project, students use the REA modeling approach to construct an extended ER model for supporting the core business activities of DataTech, a hypothetical small-sized enterprise in Ireland. The purpose of the project is to further student understanding of accounting and information technology (IT) concepts and illustrate how these concepts can be applied in practice; to connect the IT theory and skills with enterprise practices of today. These skills include: data organization, storage, analysis, presentation, and the safeguarding of accounting data, in addition to business processes and system design issues. The project described below is more comprehensive than many currently available as end of chapter exercises and projects described in Accounting Information Systems (AIS) textbooks, such as Romney and Steinbart 2012; Gelinas, Dull, and Wheeler 2012; Bagranoff, Simkin, and Norman 2010; and Kay and Ovlia 2012. The project requires students to integrate two business processes, sales and purchase. It also requires students to combine the theory underlying the business processes with database creation and accounting applications. Students create a model based on business needs, use the model to create a workable database, and use the database to answer management questions. The project has been piloted tested over the course of three semesters and modifications made based on student feedback and instructor assessments and experience. Typically the project is completed by small groups of students (ideally three) but it can also be completed individually. Acting as accounting consultants, students design, create, and populate a database system so that the company can better track and analyze its growing number of clients, agents, transactions and contracts. Students are given basic information about the company and its operations and what information management would like to see in order to more effectively manage its operations. Based on this information, students must determine what information to capture in the database, and design a schema for this purpose. To accomplish this, students need to use a different approach from the more familiar, historical double-entry system of capturing accounting information in journals and ledgers. Employing an entity-relationship (E-R) approach, students use the REA model to capture and store complex events in a robust model that will serve as a blueprint for a relational database. 2. REA MODELING The REA framework, first introduced by McCarthy in 1982, is based on accounting theory, including Sorter's (1969) work on events accounting, and on database theory, including Chen's (1976) work on entity-relationship databases. Complex systems often cannot be understood in their entirety so a model is a useful tool for minimizing this complexity. Models are built so that the system being developed can be better understood. In essence, a model is a simplification of reality, an "abstraction." Every model can be expressed at different levels of precision (abstraction). The reality of most (perhaps all) enterprises conforms to the same pattern at the business process level. A business process is a series of activities that accomplish the business objective of adding value to input resources. The term transaction cycle is often used interchangeably with business process. The commonly interconnected business processes are financing, acquisition/payment, human resources, conversion (manufacturing), and sales/collection (Dunn et al. 2005). At the value chain level, the REA model shows the interconnection of the business processes in an enterprise and the resource flow between them. McCarthy (2003) described the semantic modeling of accounting phenomena where each economic event in each transaction cycle corresponds to a resource inflow or outflow. …