By: Emanuel Schwarz

(January 3, 2000) - Let me show you how Internal Accounting has developed a totally distinct approach to disclose to management all necessary accounts that will indicate the different variances that may occur in Internal Accounting. We will also compare the cost data with the amounts recorded in the External Accounting.

You will remember that External Accounting started with two classes of accounts:

The first is the 0 Class - referring to the balance accounts. . The next is the 1 Class - referring to the Expenditure.

The last two Classes of this whole arrangement also belong to External Accounting. One Class corresponds to all Revenue accounts and the last, Class 9, is structured for the purpose of showing different result analysis and the necessary closing accounts.

Let us now study Class 9 and distinguish the purpose of the different groups of accounts that this class identifies.

The graphic below shows the two Classes mentioned in this presentation. Class 8, Revenues, is drawn here without any details, just as a reminder that it exists in the Chart of Accounts.

Next is the important Class 9, with several accounts that will show us the basic economic development of the different groups of accounts. Let us analyze these specific groups of accounts as shown in the graphic.

This group has been structured so that we may register and compare different variances within our Balance accounts. As a practical observation, we may here refer to the Pre-paid accounts with in our Assets. In our study of this new Chart of Accounts -- both for External and Internal accounting -- we came to the conclusion that we actually do not need more to have those Pre-paid accounts.

In Class 1 we should record all the actual advance. In accordance with the Matching Principals we will record the matching amount for this accounting period by crediting Class 2, Cost Elements, with such adequate amount.

This is a very interesting account; where we will be able to compare the depreciation realized in External Accounting with the amounts in Internal.

Let us explain some details of this graph. The circles and lines are all presented with dotted lines. This means that the accounts are used only at the end of an accounting period.

The dotted line entering the dotted circle 9-1 on the left side indicates that the amount will be debited to this account of group 9-1. The total amounts debited to the class 9 group circles, may be larger than the amount credited, or vice versa, therefore the dotted line leaving the group account is shown, as it could be a debit or credit balance from this account. The dotted lines leaving these group accounts are transferring the balance to the Adjusted Operating Profit or to the Profit and Loss account.

The Non-Operating Variances account will show us in the debit the amount of Expenditure that we have recorded in Class 1 - 9 and on the credit side, the amount of Non-Operating Revenues that our accounting has registered. The balance of this account will be transferred to the Profit and Loss account. The dotted line represents this procedure.

Next is an interesting and important group of accounts in Class 9. Here we will compare the actual Expenditures registered in External accounting with the Cost Elements in Class 2, Internal Accounting. We may have the total Expenditures recorded in some Main Account of group 9 - 4 and compare them with the corresponding Cost Elements-values taken from Class 2. Or, we may have more detailed information by using Sub-Accounts and show to management some important variance between External and Internal Accounting.

Within the next group of accounts (that is 9 - 5), we will have general information about the actual amounts debited to the different departments of our company and the calculated amounts that were credited to these departments.

Remember that the values that we credit the Direct Production Departments correspond to the amounts that the production has absorbed during some period of activity. The amounts that we credit other departments normally refer to the established budgeted values.

This group in Class 9 shows a general picture of the amounts recorded in Class 3 and Class 4. The detailed reports for management are prepared directly with all particular information recorded in these two classes.

The next group in Class 9 refers to the Calculated Operating Profit of our company. Here we will compare the Sales Revenues amounts with the Cost of Goods Sold recorded in Class 7. Although Financial Accounting compares only the total Revenues with the total Cost of Goods Sold, we will have the Chart of Accounts developed with all details referring to each product we produce and sell.

There is no need to tell our managers that they should use the Variable Costing procedure rather than Absorption Costing, as our university professors recommend. Modern computerized accounting -- combined with the new Chart of Accounts for Internal Accounting -- provides us with all the necessary workability to give detailed information and clearly separate Variable Cost from Fixed Cost and the Absorbed Departmental Operating Cost.

Calculated Operating Profit (or Loss) must be adjusted with the recorded Expenditures of Financial Accounting. This information is given in the 9 - 8 group of accounts. Here we establish the operating profit or loss in accordance with Financial Accounting Procedures.

Then finally we have to prepare the net profit or loss of our company.

In group 9 - 9 we transfer the Adjusted Operating Profit (or Loss) from group 9 8 and also include the Non-Operating Variances. From group 9 - 9 the balance will be transferred to the Retained Earnings or the Capital account of the proprietor.

This concludes my basic presentation of the new Chart of Accounts for Internal Accounting.