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					Bringing Accounting into the E-Commerce Age
 with REA-Based Collaboration Patterns and
          Monitored Commitments
    William E. McCarthy – Michigan State University

•   AIS Scope
•   Business Processes and Value
    Chains
•   Commitments and Types
•   E-Commerce Collaboration
    Standards
•   ebXML electronic business XML
•   REA’s Importance in a Wider
    Accounting Context
•   Range of Accounting Systems
    Bringing Accounting into the E-Commerce Age with
     REA-Based Collaboration Patterns and Monitored
                      Commitments

             Keynote address given on 1 July 2002 to
     The Accounting Information Systems Educators Association
                   Copper Mountain, Colorado

      William E. McCarthy – Michigan State University

•   Much of the content of these slides comes from co-authored papers
    and my own standards group work with the UN-CEFACT ebXML group
    and the ISO Open-edi groups, 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, Nenad Ivezic, Colin Clark,
    Katsuhiro Morita, Jake Knoppers, and many others too numerous to
    mention.
•   These slides may be reproduced, but please do not change the
    contents or attributions.
   Extending the Scope of AIS
                                       •Management Science
                                       •Behavioral & Organizational
                         MANAGEMENT             Science
                         INFORMATION   •Supply Chain
                           SYSTEMS
                                       •Computer Science

Distinguishing
Feature =
Transaction      ACCOUNTING
Processing for   INFORMATION
Accountability     SYSTEMS
Purposes
(original REA)
                                       •Financial Reporting
                                       •Managerial Decision Making
Extend with              ACCOUNTING
                                       •Auditing & Control
Commitments
                                       •Taxation
and Types for
Planning &
Policy
Purposes
                                              Source: JIS editorial, 1989
  EXAMPLE BUSINESS PARTNERS
• Company C is “Cookie Monster” or an instance
  of Customer at the end of a supply chain in the
  e-marketplace for cookies
• Company E is “Elmo” or an instance of an
  Entrepreneur who acquires the factors of production
  (cookie dough, chocolate chips) in the e-marketplace,
  converts them internally to a final product of cookies,
  and then sells them in the e-marketplace
• Company K is “Kermit” or an instance of a Komponent
  Supplier who takes agricultural essentials like wheat
  or cocoa beans, converts them into the components of
  cookies like cookie dough or chocolate chips, and then
  supplies those components to cookie manufacturing
  entrepreneurs in the e-marketplace
                                              Source: Muppet site
BUSINESS PROCESS DEFINITION: A business
process is a set of activities that takes one or
more types of inputs and turns them into an
output of greater value to the customer
(Hammer)


      cookie       Exchange or       cash
                  Transformation
          $$                               Cash           Cash                                               $$
                                           payment        payment


                                                                                $$
     $$                                     raw materials
               payment      purchase                                            logistical   shipment
                                                                                operation


                                   labor   payment      labor       labor
           $$                                           acquire
                                                                   delivered raw manufactured
                                                                   materials     goods
$$
               facilities, services             labor
               & technology                             material                             delivered
                                                        issue            manufacture
                                                       manufacture       job                 manufactured goods
                                                       operation

                         service
           payment                                                                               sale             payment
                         acquire              labor
 $$

 Example Value Chain                                 service         service
                                                     operation       contract           product services
 ______ make, deliver)
(source,______ _______                                                                        Source: ebXML BP Catalog
          $$                               Cash                Cash                                                $$
                                           receipt             paymnt


                                                                                      $$
     $$                                        raw materials
               payment      purchase                                                  logistical   shipment
                                                                                      operation


                                   labor     payment         labor      labor
           $$                                                acquire
                                                                        delivered raw manufactured
                                                                        materials     goods
$$
               facilities, services                   labor
               & technology                                  material                              delivered
                                                             issue             manufacture
                                                             manufacture       job                 manufactured goods
                                                             operation

                         service
           payment                                                                                     sale             cash rec
                         acquire                     labor
 $$

                                                        service            service
     Example Value Chain                                operation          contract           product services
 (per Porter and SCOR)                                                                              Source: ebXML BP Catalog
          Economic                     Economic                      Economic
          Resource                       Event                         Agent




                                         duality




Source: W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting
Systems in a Shared Data Environment,” The Accounting Review, July 1982, pp 554-78.
   Economic Resource


                                                         Economic Agent



                       Economic Event


                                                         Economic Agent




INITIATING

RESPONDING
                                                         Economic Agent



                       Economic Event




   Economic Resource                                     Economic Agent




                                        Source: G Geerts and W. McCarthy
Commitment &
Type Extensions
             Economic
             Contract




commitment              commitment
  to ship                 to pay



executes                executes

 cookie                  cash
                         payment
 shipment


                        Source: G Geerts and W. McCarthy
 cocoa beans                                                    cookies
 to chocolate chips




                                       Cash
                                       Cash               shipment
                                                             shipment
 Cash      shipment                    payment
                                       payment
 payment




chocolate chips
                      Recipe   Batch
                      step     run
walnuts                                   cookies

cookie dough
                                       Cookie Supply
            labor
                                          Chain
                                        Source: R. Haugen and W. McCarthy
            Types


 Resource     Event                         Agent

 Type         Type                          Type




Economic      Economic                    Economic
Resource      Event                       Agent


                         Source: G Geerts and W. McCarthy
     Examples of Type Images
          (typification)
• Resources like cookies can be classified into
     different groups with varying shelf lives
• Events like sales can be grouped into types like
     retail or wholesale with different price
     structures
• Agents like customers can be typed into groups
     like intermediaries or end users with
     different certification requirements
 Two Kinds of Business Modeling
• Descriptive: This illustrates what is
  actually occurring (OLD ACCOUNTING)
• Prescriptive: This illustrates what could
  be or should be occurring (NEW
  ACCOUNTING (some progress))
   Some Proposed Collaboration
            Patterns
• Negotiation
• Order-Fulfillment-Settlement
   – E.G. 2/10 net 30, FOB source
• Long Term Contract with Periodic
  Releases
• Escalating Commitments
• Supplier Cascade
• Drop Shipment
• International Payment and Shipment

                                       Source: ebXML BCP&MC
Extended BP model      REA components
      Planning
                        Types of Resources
                            & Agents
    Identification
                                       typification


     Negotiation         Commitments for
                        Types of Resources

                                            fulfillment

    Actualization        Economic Events
                         with Resources &
                              Agents
  Post-Actualization

                              Source: ISO Open-edi
    E-Commerce Collaboration
          Standards
• ebXML (electronic business XML) – United
  Nations CEFACT and Oasis
• eBTWG – UN CEFACT
• UBL – OASIS (nee xCBL from CommerceOne)
• ISO Open-edi
• European Commission (ECIMF)
• Others – BPML, RosettaNet etc.
• Industry Specific (AIAG, Odette, etc.)
     Electronic Collaboration –
Old (bottom-up) and New (top-down)
 • OLD technology is EDI (electronic data interchange)
 • EDI has standard documents or transaction sets @ to
   X12 (American) or EDIFACT (everywhere else)
 • NEW technology is XML
    – Bottom-up  xCBL or UBL (don’t throw away EDI legacy)
    – Top-down  ebXML BCP&MC (let’s innovate with full
      support for business process semantics)
         XML standards groups
• XML is always the foundation technology
   – Establishes the rules & syntax
• XML standards are essentially agreements among groups of
  people in a domain that define an XML tag set and a Schema
  for a particular purpose (a.k.a. “vocabularies”)
   – XBRL (eXtensible Business Reporting Language)
   – ebXML (electronic business XML)
• Ontologies & Taxonomies are implemented as specific
  interpretations or classes of XML standards (e.g., REA
  accounting ontology or the US commercial-industrial
  taxonomy for financial reporting)
• Instance documents are actual documents using a particular
  ontology or taxonomy
               Ontology
• “A specification of a conceptualization”
  Gruber
• A listing of the categories or classes in a
  certain domain and the ways they relate to
  each other
                                           follows
                                           scenario
Economic                consumes                                 Business        participates       Economic
Resource                scenario                                 Event           scenario           Agent
Type                                                             Type                               Type                      association
                                                                                                                              characterization
                                Economic                                                                 typifies
             typifies
                                Resource              typifies
                                                                    follows
linkage
characterization                                                                 participates
                                                                                                                    association
                                          consumes               Business                     Economic
                                                                 Event                        Agent


                                                                                                                                  typifies             Agreement
                                                                                                                                                         Type
                    stockflow                                                                                        forms                              (contract or
                                                                                       involves
                                                                                                                                                         schedule)
                                                                                             consists
                                                       accountability                        of          Agreement            governs
                                                                                                          (contract or
             materializes                                                                                  schedule)
                                     Economic          executes
                                     Event                               Commitment               aggregate
                    settles                                                                          of
Claim                                                 aggregate
                        initiator     terminator         of
                                                                    initiator   terminator
                                                                                                          Economic
                                    duality                               reciprocity                     Contract




                                                                      Business Process
                                                                          (exchange or
                                                                           conversion)                        aggregate
                                                                                                                 of                              Business Process
         reserves                                                                                                             typifies           Type (exchange or
                                                                                                                                                    conversion)
                                                       Source: ISO Open-edi
ebXML -- 101
Between company interoperability


              BP
            Business
          Collaboration
       Business Transactions

        Business Documents
        Business Messages
                               Source: ebXML BPSS
   C                    E                            X                       Y
Customer       ProductSupplier           LogisticsVendor                  Bank

              PO
              RA                             FundTransferAdvice
              AA                             AA
                                                         FundsTransferNotice
                                                         RA
                              FreightOrder
                              AA

    AdvanceShipNotice
    RA
                             AdvanceShipNotice
                             AA
                ShippingDocument
                AdvanceShipNotice
                RA
       ReceivingAdvice
             RA
                            FundTransferAdvice
                            AA
                               FundsTransferNotice
                               RA


   Business Process: MultiParty Collaboration
                                                                       Source: ebXML BPSS
               ebXML vision
• A global electronic market place where enterprises
  of any size, anywhere can:
   – Find each other electronically
   – Conduct business through the exchange of XML based
     messages
      • Using standard message structures
      • According to standard business process sequences
      • With clear business semantics
      • According to standard or mutually agreed trading partner
        agreements
      • Using off the shelf purchased business applications
• TEAMS: BP, CC, TP, security, messaging
  services, architecture, QC, etc.
                                                   Source: ebXML
             Collaborative Process – Interactions
1   Collaboration
                      XML
Protocol Profiles,           Business Scenarios             1
Business Process              Business Profiles
                                                             Request Business Details                   COMPANY E
  Models (BPSS)
                                                                                                         2
                                                                                            Build Local System
3        Collaboration      ebXML                 3   Register Implementation Details
                                                                                            Implementation
                            Registry
      Protocol Profiles                               Register COMPANY A Profile



4        Collaboration                        4
     Protocol Profiles,
     Business Process
       Models (BPSS)                                                            5
5
          Collaboration                                                                                          6
    Protocol Agreement            COMPANY C
                                                      ebXML compliant
                                                          system




                                                                                        Source: ebXML
       Vision of ebXML Collaboration Process
                       Business Process,
                        Core Components                                           Registry/
                                                                                 Repository
   Process                       Process
Reengineering                    Definition
         Process                                            Partner
         Evolution                                         Discovery     Collaboration
                                                                       Protocol Profile
                             Electronic
                             Business
        Process             Collaboration                   Partner
       Management                                           Sign-Up
 Business                                                          Collaboration
 Process                                                         Protocol Agreement
Management            Process                 Electronic
                     Execution                 Plug-in
          Transport/Routing/                      Business Service
       Packaging, Collaboration                       Interface
          Protocol Agreement
      Business Service Interface
                                                                       Source: ebXML
              ebXML Business Process & Information Meta-model
                     (top-down controlled complexity)

Business Area       Business Operations Map (BOM)
                     Process Area         Business Process


                         Business Collaboration         Agreement
 Partner Type                                                               Economic
                         (binary or multiparty)
                                                       Economic Event       Resources

                  Business Requirements View (BRV)
Authorizing                                                           Requesting
  Roles                                                             Business Activity
                         Business Transaction
  Business                                                        Responding
 Documents          Business Transaction View (BTV)             Business Activity


                            Business Messages                Requesting Service
  Network                                                       Transaction
 Component
                                                             Responding Service     Source:

                      Business Service View (BSV)               Transaction
                                                                                    ebXML
                                                                                    TMWG
               produce     Business                                         e.g. Fowler
 Business
               consume
                         Collaboration
  Object
                          Use Case
 realization               realization                                  <<pattern>>
                                                          implements      Business
                                              BRV
                                                                        Collaboration
   Monitored Commitment                                                Analysis Pattern


 Economic                                   elaboration                  elaboration
                           Business
 Resource                Collaboration
                                                                         <<pattern>>
                                                                          Business
 Economic                                                 implements
                          Agreement            BTV                      Collaboration
   Event                                                                Design Pattern


 Economic                 Economic       Monitored Commitment                e.g. Gamma
Commitment                Contract       is visibility of events
                                         associated with a
                                         commitment                     Source: ebXML BCP&MC
                            Economic
                            Contract




 commitment                reciprocal
                                                   commitment
   to ship                                           to pay


    fulfills                                        fulfills

   goods                     duality                cash
                                                    payment
   shipment

• E & C agree to a contract where ship on Tuesday, pay on Wednesday
• E ships on Tuesday (commitment to pay in force upon acceptable
         receipt, claim may be materialized). However, discount is taken,
         so commitment to pay is less than scheduled amount
• C pays discounted amount on Wednesday                        Source: ebXML BCP&MC
                             Economic
                             Contract



  commitment                reciprocal
                                                     commitment
    to ship                                            to pay


    fulfills                                          fulfills
    goods                     duality                 cash
                                                      payment
    shipment
• E & C agree to a contract where pay on Tuesday, ship on Wednesday
• C pays on Tuesday (claim may be materialized)
• E ships on Thursday thus invoking $20 penalty
• C notifies E that commitment to ship not fulfilled in full as unacceptable
          timing (materialized claim is reduced to $20)
• E now pays $20                                                 Source: ebXML BCP&MC
 Illustration of Perspective: Trading Partner vs. Independent

     Enterprise                                             Independent view of
                                                            Inter-enterprise events
       Business
       Process
                                      Enterprise
       Business
       Process                          Business
                                        Process


       Business
       Process                          Business                  Enterprise
                                        Process
                                                                    Business
                                                                    Process
Trading Partner view of                 Business
Inter-enterprise events                 Process
(upstream vendors and
                                                                    Business
downstream customers)
                                                                    Process


                                                                    Business
Blue arrows represent flow of goods, services,                      Process
and cash between different companies; green
arrows represent flows within companies
                                                                           Source: ISO Open-edi
    Business Objects and States
 (as embedded in COOL or the Commitment
       Oriented Orchestration Layer)
• Business Objects are the “nouns” of business deals:
• Examples: Products, Orders, Shipments, etc. (REAs)
• Business States are named states of Business Objects
   – which affect both trading partners
   – to which both partners must agree
   – which mean the whole business deal has changed in an
     important way.
• Examples: Order.accepted, Order.rejected, Order.fulfilled,
  Order.cancelled

                                                  Source: ebXML BCP&MC
BRV collaboration semantics of COOL
are based on business concepts and
             practices:
    • Accounting “Events” per REA
    • Commercial law
    • Contract negotiation and
      execution
    • International Trade
                                Source: ebXML BCP&MC
     Business State Alignment
• Means both trading partners must agree on the state
  of each Business Object at the end of each Business
  Transaction.

• 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
              ebXML Business Process & Information Meta-model
                     (top-down controlled complexity)

Business Area       Business Operations Map (BOM)
                     Process Area         Business Process


                         Business Collaboration         Agreement
 Partner Type                                                               Economic
                         (binary or multiparty)
                                                       Economic Event       Resources

                  Business Requirements View (BRV)
Authorizing                                                           Requesting
  Roles                                                             Business Activity
                         Business Transaction
  Business                                                        Responding
 Documents          Business Transaction View (BTV)             Business Activity


                            Business Messages                Requesting Service
  Network                                                       Transaction
 Component
                                                             Responding Service     Source:

                      Business Service View (BSV)               Transaction
                                                                                    ebXML
                                                                                    TMWG
        Business Process: Binary Collaboration
                            Public
             Buyer Party                Seller Party
                           CatalogReq
Business Transaction
                           CatalogRsp

                           QuoteReq
Business Transaction
                           QuoteRsp
                                                       Business
                             Order                     Collaboration
Business Transaction
                           OrderRsp

Business Transaction          ASN

Business Transaction        Invoice

Business Transaction        Payment
                                                                       Source:
                                                                       ebXML
                                                                       BPSS
               Business Transaction
                           Unit of Work
     Requesting                                         Responding
      Activity                                           Activity
                         Request Document

                               SignedReceipt
                       ReceiptAcknowledgment Signal

       Non-           AcceptanceAcknowledgment Signal
                                                           Non-
      Repudi                                             Repudi
      ation                                               ation
                            Response Document


                              Time-Outs
      Guards
Success     Failure
  Legally Binding                                                    Source:
                                                                     ebXML
                                                                     BPSS
Overview: ebXML SpecificationSchema
       Multi Party Collaboration


             Authorized
                Role


         Binary Collaboration

                                     Transition   Guard
            Choreography

                                      Request Document
        Business Transaction
                                     Response Document

    Business Transaction Execution
             Parameters
                                                         Source:
                                                         ebXML
                                                         BPSS
                     ebXML Architecture
                 Business        Business       Core/Industry
Design Time

                 Process        Documents       Components



                                              Business Libraries, Trading
                                Registries/
                                              Partner Directories, etc…
                               Repositories
               Collaboration                     Collaboration
                 Protocol                          Protocol
                  Profile      CP Agreement         Profile


                Business                             Business
                 Service         Transport            Service
Runtime




                Interface                            Interface
                                  Message

                Business                            Business
              Services/App’s                      Services/App’s

                                                                     Source:
                                                                     ebXML
                        Order
                       pending
Repository
  Business
  Process      C        Order
  Catalog      O        Goods
               N
  Business     T
 Entity Type   E        Order
   Library     X   expectingDelivery
               T
   Business
 Information            Deliver
   Entities             Goods

                                Source: ebXML BCP&MC
 Why are leveled and semantically-precise value chain
        & supply chain models important ?
       (WHY are REA patterns important ?)
•They provide automatically the detailed economic semantics of the
common order-deliver-settlement patterns of e-commerce to the
collaboration management software (as explained above);
• They provide the basis for integrating the descriptive components
of old accounting (expanded to commitments and multiple non-
monetary dimensions) with the prescriptive components of new
accounting; and
•They provide the basis for representing the “economic events” of
an enterprise with no double-entry (A= L + OE classification) spin
to both upstream parties (capital, labor, and raw material suppliers)
and downstream parties (customers) on a continuous reporting
basis (see next slide for architecture).
                       Traditional Accounting System                                           Accounting
                                                                                               Knowledge

Old
Accounting
             {          Accounts
                        Receivabl
                        e


                          Order
                          Entry
                                       Job
                                       Costing



                                     Payroll
                                                 Inventory




                                                   Gener
                                                   al
                                                   Ledger
                                                              SEC

                                                              Filing
                                                                       EDGAR FILES

                                                                                                    FSA




                                                                                                     Uses
                                                                                Present
                                                                                Use Path
                            Systems
               Real         Analysis
               World        & Design

                                                                                         Financial Decision
                                                                                              Makers


  New
  Accounting
             {          Value-Added Processing


                       Object Enterprise Model
                                                       Object-Object
                                                       Connection
                                                                       Knowledge-Based
                                                                           Decision
                                                                        Support System
                                                                                             Uses




SOURCE: G. Geerts and W.E. McCarthy “An Accounting Object Infrastructure for
 Knowledge-Based Enterprise Models” IEEE Intelligent Systems, July/August
                               1999, p.92.
ebXML
 &
XBRL
XBRL                             ebXML   XBRL
    External          COMPANY E     External    COMPANY C                       External
    Report                          Report
                                                                                Report


Reporting Taxonomy:     Business                  Business          Reporting Taxonomy:
                        Service                   Service
•AccRec – xx                                                        •Purchases – xx
                        Interface                 Interface
        Saies -- xx                                                         AccPay- xx
                        (BSI)                     (BSI)
•COGS – zz                                                             AccPay – xx
        FinGood– zz                                                            Cash -- xx

Cash – xx
        AccRec -- xx

                              Company-neutral (but
                              strictly-typed with REA)
                              view of a business
                              collaboration. For
                              example:
                                          -Order REA contract/commitment (no account)
                                          -Fulfillment REA initiator Economic Event
                                          -Settlement REA responding Economic Event
                                                        Source: J. David, G. Geerts & W. McCarthy
          Evolutionary Tree –
     Enterprise Information Systems
                                                Enterprise
                                                 Systems




No Organizing
  Rationale                                  Inwardly Oranized                                                           Outwardly
                                                                                                                         Organized




 Single Entry                                                              Enterprise                               Trading
                         A = L + OE               Hybrid                                                                        Independent
                                                                          Value Chain                               Partner



                                                                 Single                 Best of
                                                                 Source
                                                                  ERP                 Breed ERP




Transactions                      Multi-          Modular                     Integrator-   Standards-      Supply        Customer
                Bookkeeping    dimensional      Integration:      ERP
& Obligations                  Accounting        ABC, MRP                      Enabled       Enabled        Chain         Focused

  MS Money                      Platinum                         PeopleSoft                   OMG
   Quicken                      Solomon                            SAP                        OAG                          Siebel
                                                                                                                          Goldmine

                Peachtree                          BPCS                   Constellar Hub
                Quickbooks                 Great Plains Dynamics                                             i2                  ebXML
                                                                              Vitria                        Ariba             ISO Open -EDI


                                                                                                     Source: J. David, W. McCarthy & B. Sommer

				
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