January 26, 2022

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Everything you should know about the REA Model in AIS

Everything you should know about the REA Model in AIS
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REA is an acronym for resource, events, and agents. This model is a framework for most relational databases. And helps users to see transactions not only from accounts in ledger books but as events. In this article, we will define the REA accounting system and give some detailed explanations.

Definition of REA Model

The REA model is “an accounting framework for modeling an organization’s critical resources, events, and agents
(REA) and the relationships between them,” according to James Hall in the book Accounting Information System.

In other words, the REA model is an accounting information system that sees transactions in terms of resources, events, and agents and puts them together in a relational database to help users view multiple data.

Key Explanations of REA model

The REA model was proposed in 1982 as a theoretical model for accounting. Although it is gaining momentum, this model is yet to see the full application in the real world. More so, it focuses on the resource, events, and agents. These three terms are what every transaction is made up of.

Resources are the assets of a business. They are scarce economic resources and are within the control of the entity concerned. Examples of economic resources are cash and cash equivalents, properties, plants, and equipment. However, for the REA model, accounts receivable are not regarded as resources.

This makes it different from the traditional accounting system. Accounts receivable is not an important part of the system because it is used to store facts that are already in the system. Therefore, “AR values are derived from the difference between sales to customers and the cash received in payment of sales,” says James Hall.

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Events are activities that influence changes in economic resources. They are the result of production, exchange, consumption, and distribution. For example, when a sale is made, it changes the economic resources of the entity. Sales mean an increase in revenue on one hand and an increase in cash and cash equivalents on the other hand. Therefore, economic events are the critical aspect of the REA model. As a result, they must be captured in the accounting system with a rich database.

Agents are people that are involved in an economic event. Economic agents have the power to use or dispose of economic resources. These agents can be within or outside an organization. Examples of agents include sales clerks, production workers, shipping clerks, customers, and vendors.

Conclusion

The REA model is a relational database model for an accounting information system. It is still more of a theoretical model than practical as most accounting information systems maintain the classical accounting style such as double entry and ledger.

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