a hypothetical retailer can be used to illustrate the inherent differences between classical and REA accounting: Sept. 1: Sold 5 units of product X21 @ $30 per unit and 10 units of product Y33 @ $20 per unit to customer Smith (Total sale = $350). The unit cost of the inventory is $16 and $12, respectively (Total CGS = $200). Sept. 30: Received $200 cash from customer Smith on account, check number 451. In flat-file or non-REA database systems, the two events would be recorded in a set of classical accounts like those shown in Figure 1-14. This involves summarizing the events to accommodate the account structure. The details of the transactions however, are not captured under this approach. An REA accounting system would capture these transactions in a series of relational database tables that emphasize events rather than accounts. This is illustrated in Figure 1-15. Each table deals with a separate aspect of the transaction. Data pertaining to the customer, the invoice, specific items sold, and so on, can thus be captured for multiple uses and users. The tables of the database are linked via common attributes called primary keys (PK) and embedded foreign keys (FK) that permit integration. In contrast, the files in the traditional system are independent of each other and thus cannot accommodate such detailed data gathering. As a result, traditional systems must summarize event data at the loss of potentially important facts. Traditional accounting records including journals, ledgers, and charts of accounts do not exist as physical files or tables under the REA model. For financial reporting purposes, views or images of traditional accounting records are constructed from the event tables. For example, the amount of Smith’s account receivable balance is derived from {total sales (Quant sold * Sale price) less cash received (Amount) = 350 – 200 = 150}.
FIGURE 1-14
Classical Accounting Records in a Non-REA System
Accounts Receivable File Customer Number 23456 Customer Name Smith
Debit 350
Credit 200
Balance 150
Cost of Goods Sold File Acct Number 5734
Debit 270
Credit
Sales File Acct Number 4975
Credit 350
Part I
Overview of Accounting Information Systems
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