REA

Last updated 5 months ago

REA is a simplified method of accounting that was initially developed by Professor William McCarthy of Michigan State University in 1982, and since has been adopted and extended by a growing global community.

As you can see from the community page, REA has been incorporated in ecommerce standards by the United Nations and ISO, the official international standards organization. People from Group Accounting contributed significantly to both of those standards. REA's benefits for a new economic system include:

  • REA does not require any accounting knowledge (for example, no debits and credits), so it's easy to use. While Quick Books (for example) makes accounting pretty easy for some business functions, REA can do it for everything, including functions that Quick Books does not handle like inventory, production and distribution.

  • Unlike typical double-entry accounting which records economic events from the viewpoint of one company, REA can take a neutral view, which means it can be used for groups of all sizes and legal forms. (That's why we use it for Group Accounting.)

  • REA's neutral view means it can scale up from single individuals to companies to groups of companies to regions to nations to the whole planet.

  • REA does not assume everything is exchanged for money in standard currencies: it works for barter, sweat equity, and alternative currencies.

  • REA can account for "externalities" like air, water, soil, and other necessities of life that are ignored by "standard" accounting.

The ABC's of REA

Resources: include products, services and money.

Agents: include any person or organization who is responsible for some resources.

Events: include exchanges of resources between agents, consumption of resources, and production of new resources.

REA records economic events exactly as they happened, with no interpretation (unlike double-entry accounting, which requires an interpretation of what happened from the viewpoint of one of the agents involved in the event).

For example, Farmer A traded 100 units of wheat to miller B on March 9, 2008 at 2pm UT for 100 units of bio diesel fuel, which Miller B got from digester D.

From the basic economic event records, REA software can automatically generate all of the standard financial reports, lots of other useful reports, and can even generate those double-entries automatically if somebody really really wants them.

Also, because the basic event records in REA are naturally related, we can trace the flows of resources through a community (for example, the bio diesel feedstock from one farmer to the digester, and then the biodiesel fuel through the miller to another farmer).

Useful links

http://www.jeffsutherland.org/oopsla2000/mccarthy/mccarthy.htm