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{{Paper
|id=Vol-1612/paper6
|storemode=property
|title=REA Business Management Ontology: Conceptual Modeling of Accounting, Finance and Management Control
|pdfUrl=https://ceur-ws.org/Vol-1612/paper6.pdf
|volume=Vol-1612
|authors=Walter S.A. Schwaiger
|dblpUrl=https://dblp.org/rec/conf/caise/Schwaiger16
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==REA Business Management Ontology: Conceptual Modeling of Accounting, Finance and Management Control==
https://ceur-ws.org/Vol-1612/paper6.pdf
REA Business Management Ontology:
Conceptual Modeling of Accounting, Finance and
Management Control
Walter S.A. Schwaiger
Institute of Management Science – TU Wien, Vienna, Austria
Walter.schwaiger@tuwien.ac.at
Abstract. Geerts and McCarthy [5, 6] established the REA business ontology.
In its accounting and policy infrastructure the informational and procedural
elements which are needed for accounting and management purposes are speci-
fied. An investigation of the requirements in the disciplines of accounting,
finance and management control shows that the ontology is not complete. By
including the concepts of accounting records, financial contracts and manage-
ment systems the REA business ontology is extended and the resulting REA
business management ontology covers the informational and procedural re-
quirements from accounting, finance and management control. The REA busi-
ness management ontology is a comprehensive ontology and it should be useful
especially for business analysts who have to design accounting, enterprise and
management information systems.
Keywords. REA business ontology, ALE accounting, financial contracts and
derivative instruments, management control systems, accounting, enterprise and
management information systems
1 Introduction
McCarthy [10] introduced the REA accounting model to conceptualize the logic of
accounting in terms of economic resources (R) that are exchanged in economic events
(E) between economic agents (A). With the REA accounting framework he viewed
accounting theory in contrast to conventional accounting literature in a stock and flow
perspective. This framework, called the REA accounting model, is developed using
data modeling techniques, and its underlying structure is found to consist of sets
representing economic resources, economic events, and economic agents plus rela-
tionships among those sets. [10, p. 554]. The economic core of the REA accounting
model is the duality principle. The duality relationship expresses the economic ratio-
nale that scarce resources have a positive price that has to be paid in an exchange
transaction from the buyer to the seller. McCarthy relates economic resources closely
to tangible assets. He explicitly distinguishes economic claims from the economic
resources to emphasize the temporal imbalance between the flows of the economic
resources in economic transactions like e.g. credit-card sales and sales on account.
Copyright © by the paper’s authors. Copying permitted only for private and
academic purposes.
In: S. España, M. Ivanović, M. Savić (eds.): Proceedings of the CAiSE’16 Forum at the
28th International Conference on Advanced Information Systems Engineering, Ljubljana,
Slovenia, 13-17.6.2016, published at http://ceur-ws.org
CEUR
ceur-ws.org
Workshop ISSN 1613-0073
Proceedings
42 Walter S.A. Schwaiger
Geerts and McCarthy [5, 6] extended the REA accounting model to the REA busi-
ness ontology which also contains economic contracts and a policy infrastructure.
They defined economic contracts as economic bundles of economic commitments
which fulfill the reciprocity principle. The reciprocity principle is the conceptual ana-
logue of the duality principle. The policy infrastructure relates to the planning and
control level (policy level) where semantic abstractions in form of typification and
grouping were introduced. For demonstration purposes they give the following policy
definition examples: We distinguish between among the following three types of poli-
cy definitions: knowledge-intensive description, validation rules, and target descrip-
tions. A knowledge-intensive description defines characteristics of a concept that
apply to a group of objects. … A validation rule represents permissible values, and a
common application of validation rules in enterprise systems is preventive controls.
… Target descriptions provide benchmarks regarding economic phenomena, and they
can take at least two different forms: standards and budgets. [5, p. 39f].
Policy
Infrastructure
Business
refer refer
Policy
refer refer
Economic Economic
Economic Agent
Resource Event
Agreement Type
Type Type
specifi- specifi-
cation cation
typification
typification typification reci- typification
Economic Economic
procity
Commitment economic Contract
bundle
fulfillment
Economic resource Economic from Economic
Resource flow Event to Agent
site materialized
duality
settlement
Business Economic
Location Claim
Accounting
Infrastructure
Fig. 1. REA Business Ontology – Accounting and Policy Infrastructure
Figure 1 shows the REA business ontology in form of class diagram which is used
in the ISO/IEC 15944-4:2006 standard [8, p. 33] Accounting and Economic Ontology
(AEO) to model business transactions. The REA accounting model is the lower part
of the figure which specifies the accounting infrastructure of the REA business ontol-
ogy. The upper part is the policy infrastructure which contains the economic com-
mitments and the economic contracts as well as the REA types and the economic
agreement on which the business policy refers to.
The REA business ontology is a powerful and convenient model for understanding
business processes in economic as well as in business policy terms. The narrow focus
REA Business Management Ontology 43
on tangible resources and claims makes the ontology quite easily understandable.
Tangible resources like materials, goods and cash are incremented and decremented
in economic events. But the narrow focus causes problems as well, as accrual ac-
counting requirements and financial contract specific requirements are not covered.
Furthermore there are deficiencies with respect to the planning and control of busi-
ness processes which are not sufficiently covered in the REA business ontology.
The primary research objective of this article is the specification of the relevant
concepts underlying the disciplines of accounting, finance and management control as
well as their consistent integration into the REA business ontology. For this purpose
the REA business management ontology is developed which covers the relevant re-
quirements. The name of the ontology is taken to distinguish it from the REA man-
agement ontology. This term was introduced by Weigand et al. [14] for the general
framework of services when they modeled management as services. The REA busi-
ness management ontology covers and integrates the conceptual models that are ap-
plied in the accounting, finance and management control domains.
The structure of this article is as follows. In the next section REA Business Ontolo-
gy meets Accounting, Finance and Management Control the missing concepts in the
REA business ontology for accounting, finance and management control purposes are
identified. In the subsequent section the REA Business Management Ontology is de-
veloped by integrating the accounting transaction model, the extended contract model
and the management system model into the REA business ontology. In the final sec-
tion the paper is concluded.
2 REA Business Ontology meets Accounting, Finance and
Management Control
Although the REA business ontology conceptually originated from the accounting
domain it does not cover fundamental accounting requirements. In Schwaiger [12]
deficiencies of the REA business ontology with respect to the traditional Asset Liabil-
ity Equity-/ALE-accounting logic [7] are detected in form of insufficient accounting
transaction recordings of debited and credited changes in asset, liability and equity
resource types. On the other side it is shown that the commitments in the REA busi-
ness ontology are beneficial for integrating the peculiarities of financial instruments.
With respect to management control considerations Church and Smith [3] identify
shortcomings as the REA business ontology does not support Balanced Score Card-
/BSC based performance management systems.
2.1 REA Business Ontology meets Accounting and Finance
In order to promote the understanding of the REA business ontology within the ac-
counting community the inclusion of the double-entry bookkeeping elements in form
of the debit and credit notation is unavoidable. The debit and credit linguistic terms
are needed to give the increment and decrement events of assets, liabilities and equity
a consistent interpretation within the ALE-based accounting equation. This is the
44 Walter S.A. Schwaiger
main conclusion derived by Schwaiger [12, p. 572] when analyzing the essential defi-
ciencies of the REA business ontology with respect to its applicability in the account-
ing domain. In order to correct this shortcoming he developed the accounting transac-
tion model and introduced the ALE resource typification.
Agreement
Type
Infrastructure
Policy
typification
1…* Economic economic
reciprocity Commitment bundle
present Contract
value
restriction
fulfill-
ment
0…*
Economic from
value- Economic Economic
Resource
Infrastructure
flow Event Agent
Accounting
(ALE et al.) to
value
site duality
restriction materialized
Accounting settlement
Transaction
Business Economic
Location Claim
Fig. 2. REA-based ALE Accounting Ontology [12, p. 571]
Figure 2 shows the REA-based ALE accounting ontology which contains the ac-
counting transaction model with the associated value restriction and the ALE resource
categories. To make the REA business ontology compatible with the future oriented
perspective in finance the economic model of the REA business ontology is defined
as a composition of commitments and economic events which obey the present value
restriction. This economic contract specification requires that at least one future
commitment is involved. The advantage of this specification is that it allows the re-
presentation and recording of all different types of derivative, non-derivative and
structured financial instruments.
2.2 REA Business Ontology meets Management Control
Church and Smith [3, p. 8] have BSC-based performance management system in
mind when they make the following observation. The REA framework reflects enter-
prise economic activity but does not directly address the management activity related
to control processes. The REA framework offers type images as the vehicle for model-
ing organizational policy, such as budgets, bill of material, or pricing policy (Geerts
and McCarthy 2001b, 2003). The REA type image structure does not, however, de-
scribe the managerial processes and control structure necessary to plan, link, com-
municate, or learn from type-level information. For example, REA policy type images
can apply internal controls, such as segregation of duties, to operational level eco-
nomic activity (Geerts and McCarthy 2003), but the REA policy infrastructure does
REA Business Management Ontology 45
not address how the internal control is established or who is responsible for monitor-
ing its effectiveness.
Church and Smith address the problem of missing managerial processes and miss-
ing control structures by putting a managerial planning and measurement process [3,
p. 17] on top of the REA business ontology. Figure 3 shows the class diagram version
for this process. It includes managerial events for the two planning activities strategic
initiative and set target and for the two control activities evaluate and measure. With
the managerial events it is answered how the plans and controls are established. The
informational resources added are resources committed and strategic objective related
to the planning activities as well as performance measure related to the control activi-
ties. Furthermore agents are assigned to the planning and control activities. This an-
swers who is responsible for these activities.
<> <> <>
Resources Strategic Internal
IR IA
Committed Initiative Agent
OO IO TT IM
Strategic Set
TO TM Manager
Objective Target
OM
dual EM
(including feedback)
Performance
EP Evaluate EE Evaluator
Measure
ME
MP
External
Measure MA
Agent
Fig. 3. BSC-based Management System – Managerial Planning and Measurement Process
This modeling of the managerial planning and measurement process in the BSC-
based management system provides a solid foundation for considering the informa-
tional and procedural requirements for planning and control processes. There is just
one minor question left open: What is the sense of the performance measurement and
evaluation, if there are no evaluation results and thereupon defined adjusting conse-
quences?
This point can be clarified by having a closer look into the management control
discipline which was established by Anthony [1]. The issue relates to the closing of
the loop aspect of planning and control systems. Closing the loop generates closed
loop performance management systems, which include the fundamental characteris-
tics of cybernetics that was introduced by Wiener [15] in form of the feedback prin-
46 Walter S.A. Schwaiger
ciple and the control and communication principle. This feedback information and the
corresponding control inputs can be interpreted as being part of the OM relationship
which links the informational resources strategic objective and performance measure.
Otley and Berry [11] apply the feedback and communication principle of control in
an organizational context to specify different closed loop control structures and to
design corresponding accounting information and control systems. The different con-
trol structures are distinguished by the different ways the control input can adjust the
planning and control system. In single loop structures the control input adjusts the
input of the operational process which is the first order control in Otley and Berry
[11, p. 236]. In double loop structures – as originated by Argyris [2] – the control
input can relate to different things. In the second order control it adjusts the objec-
tive/target, in internal learning it adjusts the prediction model used in the evaluate
activity and in systemic learning it adjusts the business process itself by adjusting the
business policy.
3 REA Business Management Ontology
After having identified in the previous section the deficiencies of the REA business
ontology with respect to the accounting, finance and management control disciplines,
the ontology can be extended to eliminate these shortcomings. The resulting ontology
is the REA business management ontology which is shown in figure 4. It extends the
REA business ontology by including the accounting transaction model and the mod-
ified contract model from the REA-based ALE accounting ontology and the closed
loop performance management model that underlies the BSC-based management
system.
The accounting transaction model is integrated as a composition of economic
events. This model assures that the reporting requirements of the financial reporting
standards are fulfilled. The extended contract model is a composition of economic
events and commitments so that all derivative and non-derivative financial contracts
are covered in the ontology.
The management system model is integrated by adding the three type images to the
policy layer, i.e. managerial event, managerial resource and (managerial) agent. The
parenthesis connected to (managerial) agent indicates that in this type image also non-
managerial agents are included.
In the planning activity strategic initiative within the managerial events the busi-
ness policy (including the resources committed which have to be performed by inter-
nal agents) is set and adjusted over time. The intention of the business policy is to
achieve the strategic objective (managerial resource) which is also set in the strategic
initiative activity by the responsible manager. For the strategic objective specific tar-
gets are set in the planning activity set target. In the control activity evaluate the per-
formance measured in the activity measure is compared with the set objectives and
targets to derive the feedback which induces control inputs into the business process
defined in the economic events for single loop learning and/or control inputs into the
planning activities strategic initiative as well as set target as for double loop learning.
REA Business Management Ontology 47
The interplay between the objectives and targets in the policy layer and the measured
results in the business layer produces the feedback information which is used in the
terminology of McCarthy [10] to materialize conclusions with respect to the sin-
gle/double loop learning.
Business
refer refer
Policy
Business Planning and Control System
set and
refer
adjust
achieve
Resource
Managerial (Managerial) Agreement Agent
Type
Event Agent Type Type
(ALE et al.) responsible
set and adjust typification
refer
Managerial reci- 1…* Economic economic
Commitment bundle
Resource procity present Contract
value
restriction
typification typification
Economic conclusion
materialization fulfill-
Event
ment
Type
0…*
typification
Economic value Economic from Economic
Business System
Resource flow Event to Agent
value duality materialized
site
restriction
settlement
Accounting
Transaction Business Economic
Location Claim
Fig. 4. REA business management ontology
4 Conclusions
The primary research objective of this article was the extension of the REA business
ontology developed by Geerts and McCarthy so that it adequately covers the relevant
concepts underlying the disciplines of accounting, finance and management control.
For this purpose the REA-based ALE accounting ontology from Schwaiger [12] and
the BSC-based management system from Church/Smith [3] were used to identify the
shortcomings of the REA business ontology in form of missing accounting transac-
tions, missing financial instruments representations and missing performance man-
agement systems. These shortcomings were solved by including adequate models into
the REA business ontology and extending it to the REA business management ontol-
ogy.
The REA business management ontology should be beneficial especially for busi-
ness analysts who are engaged in the design of accounting, enterprise and manage-
ment information systems. The big advantage of this ontology is its comprehensive-
ness. This should allow overcoming the currently often used silo modeling approach-
es into the direction of a mutually consistent modeling approach. In this sense the
48 Walter S.A. Schwaiger
accounting information systems research (e.g. Steinbart and Romney [13]), the enter-
prise information systems research (Dunn, Cherrington and Hollander [4]) and the
management information systems research (e.g. Laudon and Laudon [9]) could be
aligned and unified in order to establish information systems which cover the infor-
mational and procedural requirements needed in accounting, finance and management
control.
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