Question

How are REA diagrams read, and what do they reveal about the business activities and policies of the organization being modeled?

Answer 1

REA is envisaged as the targeted Accounting information system to be adopted/re-engineered in business based on modern computer age. It is based on the concept of Resources, Events and Agents. REA is at odds with double-entry book-keeping system and fails to recognise resources, objects or events which are not tangible, eg goodwill and its amortization etc

The REA model is best understood by understanding the "R" the "E" and the "A".

• Resources: Economic resources or claims are objects that are under the control of an economic agent. Economic resources/claims may things such as goods, services, rights, obligations, claims.
• Event: Economic events are the events, transactions, circumstances, and other phenomena which change economic resources from production, exchange, consumption, and distribution.
• Agent: Economic agents are identifiable parties which obtain, use, or dispose of economic resources.

REA is sought to replace the legacy business systems. It identifies each aspect of business as distinct (like sales, purchases etc) and there is a separate REA diagram for each value-chain/ functional department. Each of the phases have an event which results in the exchange of resources between agents (for instance, processing of a sales order, payment of salaries etc). Each of the phases are sought to be linked creating entity-wide relationships (though it is not mandatory).

REA is a more dynamic concept instead of the whole entity-wide accounting system. Each of the phases can be amended/ changed based on business requirements. Also, real-time report generation is possible.