• Much of the content of these slides comes from co-authored papers and my own standards group work with ebXML, the UN-CEFACT BP group, and the ISO Open-edi group, so the ideas are due to many people besides myself. These include Guido Geerts, Julie David, Bob Haugen, John Yunker, Jim Clark, Brian Hayes, Paul Levine, Jamie Clark, Dave Welsh, Karsten Riemer, Nita Sharma, Colin Clark, Nenad Ivezic, Katsuhiro Morita, Jake Knoppers, David Clemis, Hannu Pelkonen, Steve Mathews, and many others too numerous to mention.

• These slides may be reproduced, but please do not change the contents or attributions.

The REA Accounting and Economic Ontology and Its Use in E-commerce Standards

William E. McCarthy – Michigan State University

PHONE: 517-432-2913 EMAIL: mccarth4@msu.edu

EconomicEvent

EconomicAgent

EconomicResource

duality

• See Accounting Review article (July 1982)• See Issues in Accounting Education article (NOV 2003)

INITIATING

RESPONDING

Economic Event

Economic Agent

Economic Agent

Economic Resource

Economic Event

Economic Agent

Economic Agent

Economic Resource

Pattern: A prototypical constellation of objects

• REA is an business process pattern

• Can we standardize the world of ERP business objects and business object connections with a library of BP patterns ?

• Can we standardize collaboration space with collaboration patterns ?

Evolutionary Tree – Enterprise Information Systems

EnterpriseSystems

No OrganizingRationale Outwardly

Organized

Single Entry

Transactions& Obligations

A = L + OE EnterpriseValue Chain

BookkeepingModular

Integration: ABC, MRP

ERP SupplyChain

Multi-dimensionalAccounting

Hybrid

Inwardly Oranized

Best ofBreed ERP

Integrator-Enabled

Standards-Enabled

SingleSourceERP

CustomerFocused

MS MoneyQuicken

PeachtreeQuickbooks

PlatinumSolomon

PeopleSoftSAP

OMGOAG Siebel

Goldmine

i2Ariba

Constellar HubVitria

BPCSGreat Plains Dynamics

TradingPartner Independent

ebXMLISO Open -EDI

A business process is a set of activities that takes one or more kinds of input and creates an output that is of

greater value to the customer (Hammer)

A value chain is a purposeful network of business processes aimed at assembling the individual components of a final product (i.e., its portfolio of attributes) of value

to the customer (Porter)Definitions of Business Process and Value Chain

cookiesConversion Cycle

labor

cookie ingredient

s

Acquisition Cycle

Revenue Cycle

cash cash

business process

business process

business process

value chain

delivered raw materials

delivered manufactured goods

$$$$

$$

$$ manufactured goods

payment

sale

Cash payment

Cash payment

logistical operation

shipment

labor

payment

labor acquire

labor

labor

facilities, services & technology

payment

service acquire

manufacture job

material issue

manufacture operation

$$

$$

service contract

service operation product services

labor

raw materialspurchase

payment

$$

Example Value Chain (source, make,

deliver) ______ ______ _______

Buyer Seller

Third Party

Collaboration Space

Value Exchange

Concept of a Business Collaboration

Source: ISO Open-edi

event stream

fail to pay

pay

pay

pay

pay

deliver

deliver

deliver

deliver

deliver return

fail to deliver

pay

pay

SELLER

BUYER

Type & Commitment Extensions

Harry

Jane

Named Set of Objects

Tom

Dick

Ashley

Typification

Salespeople

Tom

Dick

Ashley

Abstraction

Harry

Jane

Named Set of Objects with Labeled Clusters

Group & Name Clusters Cashiers

Named Set of Groups

Cashiers

Salespeople

Economic Agent Type

Economic Agents

Operational Level

Knowledge Level

Source: Geerts and McCarthy, type paper

delivery paymentduality

commitment to deliver

Economic Contract

commitment to pay

reciprocal

fulfillsfulfills

Contract as a Bundle of CommitmentsSource: Geerts and McCarthy, ontology paper

Business Role

Economic Commitme

nt

Resource Type

Event Type

specifies

specifies

specifies

Source: Geerts and McCarthy, ontology paper

Exchange with Commitments and Types

Economic Event

Economic Resource

Economic Agent

stockflow from

to

fulfills

duality

Economic Resource

Type

typifies

specifies

Economic Event Type

Role

typifies

Economic Commitment

reciprocal

specifies specifies

typifies

Source: Geerts and McCarthy, ontology paper

ISO Open-edi Ontology Collaboration Model

Bilateral Collaboration

governs

Economic Event

Economic Resource

Economic Agent

stockflow from

to

Economic Contract

Economic Commitment

reciprocal

fulfills

establish

duality

Economic Resource

Type

typifies

specifies

Economic Event Type

Business Role

specifies

specifies

typifies

qualifies

reserves

involves

Partner Third Party

Mediated Collaboration

Business Transaction

participates

requires

Agreement

Regulator

constrains

Business Object

State Machine

Example

Business State Alignment• Means both trading partners must agree on the

state of each Business Object at the end of each Business Event.

• For example, the Order is not accepted until both partners agree explicitly that it is accepted.

• The Business Transaction protocol must insure that both partners transition to the new Business State - or neither does.

• Think “electronic handshake”.

Source: ebXML BCP&MC

• Planning: In the Planning Phase, both the buyer and seller are engaged in activities to decide what action to take for acquiring or selling a good, service, and/or right.

• Identification: The Identification Phase pertains to all those actions or events whereby data is interchanged among potential buyers and sellers in order to establish a one-to-one linkage.

•  Negotiation: The Negotiation Phase pertains to all those actions and events involving the exchange of information following the Identification Phase where a potential buyer and seller have (1) identified the nature of good(s) and/or service(s) to be provided; and, (2) identified each other at a level of certainty. The process of negotiation is directed at achieving an explicit, mutually understood, and agreed upon goal of a business collaboration and associated terms and conditions. This may include such things as the detailed specification of the good, service, and/or right, quantity, pricing, after sales servicing, delivery requirements, financing, use of agents and/or third parties, etc.

• Actualization: The Actualization Phase pertains to all activities or events necessary for the execution of the results of the negotiation for an actual business transaction. Normally the seller produces or assembles the goods, starts providing the services, prepares and completes the delivery of good, service, and/or right, etc., to the buyer as agreed according to the terms and conditions agreed upon at the termination of the Negotiation Phase. Likewise, the buyer begins the transfer of acceptable equivalent value, usually in money, to the seller providing the good, service, and/or right.

• Post-Actualization: The Post-Actualization Phase includes all of the activities or events and associated exchanges of information that occur between the buyer and the seller after the agreed upon good, service, and/or right is deemed to have been delivered. These can be activities pertaining to warranty coverage, service after sales, post-sales financing such as monthly payments or other financial arrangements, consumer complaint handling and redress or some general post-actualization relationships between buyer and seller.

SOURCE: ISO FDIS 15944-1 – Operational Aspects of Open-edi for implementation ISO Open-edi Phases of a Business Transaction

Phases of a Business Transaction and Object States for Completion

Business Transaction

Planning Identification Negotiation ActualizationPost

Actualization

Economic Resource

Type Identified

Corresponding Partners Identified

Economic Contract Complete

Requiting Economic

Event Complete

Invoked Warranty

Component Complete

1. Seller sends Catalog to Prospective Buyer2. Buyer sends AvailabilityandPriceRequest to Supplier3. Supplier returns AvailabilityandPriceResult to Buyer4. Supplier sends OrderRequest to Buyer 5. Buyer sends Offer to Supplier6. Supplier sends CounterOffer to Buyer7. Buyer sends an OrderAcceptance to Supplier for parts8. Seller sends an AdvanceShippingNotice when goods are

prepared for shipping9. Buyer sends ReceivingReport to Seller when inspected

goods are accepted10. Seller sends an Invoice to Buyer after parts are shipped11. Buyer sends RemittanceAdvice to Seller with information

about payment of the Invoice12. Buyer sends WarrantyInvocation to Seller

Business Events in an Example Business Transaction

State Model of Business Collaboration:

Economic Event

Economic Resource Partner

resourceflow

site

from

to

Economic Claim

Economic Contract

Economic Commitment

settles

fulfills

establish

Location

duality

AgreementEconomic Resource

Type

Location Type

typifies

typifies

specifies

specifies

Economic Event Type

Partner Type

specifies

specifies

typifies

typifies

Business Transactiongoverns

regulate

reciprocal

Business Event

Seller sends Catalog to Prospective Buyer

Buyer sends AvailabilityandPriceRequest to Supplier

Supplier returns AvailabilityandPriceResult to Buyer

Buyer sends Offer to Supplier with proposed details of resource, location, event, & partner

Supplier sends counter-offer, acccepting resource and location and countering on event and partner

Buyer accepts details of counter-offer on shipment and proposes payment schedule

Seller sends an AdvanceShippingNotice when goods are prepared for shipping

Buyer sends ReceivingReport to Seller when inspected goods are accepted

Seller sends an Invoice to Buyer after parts are shipped

Buyer sends RemittanceAdvice to Seller with information about payment of the Invoice

Buyer sends WarrantyInvocation to SellerSeller accepts payment schedule,

completing contract specification

Business Entity Type Model

<<Stereotype>> BusinessEntityType

#baseClass : string=“Class” +identification : string +name : string +description : text

<<Stereotype>> BusinessEntity

BusinessEntityIdentity +identityConstraint : Expression

<<Stereotype>> BusinessEntityLifecycle

#baseClass : string=“Statemachine” +identification : string +name : string +description : text +lifecycleConstraint : Expression

Organization

Organization

Namespace

Namespace

1 *

1 1 * BusinessEntityContent +contentConstra

BusinessEntitySemantic +semanticConstraint : Expression +useDescription : text

BusinessEntitySemantic +semanticConstraint : Expression +useDescription : text

<<Stereotype>> BusinessEntityState

#baseClass : string=“State” +identification : string +name : string +description : text +entryCondition : Expression +exitCondition : Expression

<<Stereotype>> EconomicElement

<<Stereotype>> EconomicElement

+reaType +reaType

BusinessEntityContent +contentName : string +contentConstraint : Expression +compositionDescription : text

<<Stereotype>> BusinessInformationEntity

+documentElementMapping : Expression

+implementation * +requiredContent +visibleContent

*

*

*

<<Stereotype>> Context

+context

1

+instanceIdentification +versionIdentification * 1 *

*

+semanticParent

+semanticContent

SemanticElement +identification : string +semanticName : string +description : text +constraint : Expression

1

1

*

1

* * *

*

+component

+externalDefinition

Source: UN/CEFACT BETL

Issues & Problems• Formalization• Domain specific paper

– Enterprise ontology– Collaboration space

ontology• Extensions

– Mediated collaborations ( = 2 ?)

– Workflow & business events

– States of objects– Controls & policies– Aggregate accounting and

economic objects

ACustomer

BProductSupplier

CLogisticsVendor

DBank

PORAAA

FreightOrderAA

AdvanceShipNoticeRA AdvanceShipNotice

AA

ShippingDocumentAdvanceShipNoticeRA

FundTransferAdviceAA

ReceivingAdviceRA

FundTransferAdviceAA

FundsTransferNoticeRA

FundsTransferNoticeRA

Source: David, Geerts and McCarthy

Mediated Collaborations

IS THE ANSWER ALWAYS = 2 ??- economically ?- accounting ?

- legally ?- technically ?

Sample Business Object

Example States for Business Object

Business Transaction • Waiting-Start • In-Service• Completed• Aborted• Suspended

Economic Claim • Materialized• Settled

Economic Resource Type • Planned• Identified• Proposed• Specified• Substituted

Business Transaction Phase • Pending• In-Service• Complete

Sample States for Business Objects

REA use in different

standards

E-Commerce Collaboration Standards

• ebXML– United Nations CEFACT (BP, catalog)• UN CEFACT (UMM), BOTL, BCP&MC, UBAC• ISO Open-edi• European Commission (ECIMF)• OAG ??• Others – OMG, etc. ??

Business Domain View (BDV)

Business Requirements View (BRV)

Business Transaction View (BTV)

Business Service View (BSV)

UMM metamodel

Process Area Business Process

Business Transaction

Business Collaboration(binary or multiparty)

RequestingBusiness Activity

RespondingBusiness Activity

Business Messages Requesting Service Transaction

Responding ServiceTransaction

Agreement

Economic Event

Network Component

Authorizing Roles

Partner Economic Resources

Business Documents

Business Area

Source: ebXML TMWG

COMPANY E

Business Service Interface (BSI)

Business Service Interface (BSI)

COMPANY C

Reporting Taxonomy:•Purchases – xx

AccPay- xx

Reporting Taxonomy:•AccRec – xx Saies -- xx •COGS – zz

FinGood– zz

Company-neutral (but strictly-typed with REA) view of a business collaboration. For example:-Order

-Fulfillment -Settlement

XBRL ebXML XBRL

Cash – xx AccRec -- xx

AccPay – xx Cash -- xx

REA contract/commitment (no account)REA initiator Economic

EventREA responding Economic Event

External Report

External Report

External Report

Source: J. David, G. Geerts & W. McCarthy

REA State

Machine