Internal Accounting

Structure and Development

INTERNAL CHART OF ACCOUNTS .

Supporting the Responsibility Accounting system, with detailed departmental operating accounts, introducing important re-allocation procedures and identifying basic functional activity accounts, this Managerial Accounting system will produce the very best reports.

Our Chart of Accounts framework represents the most sophisticated approach to Managerial Cost Accounting, offering unparalleled precision in cost classification and financial analysis.

Exhibit 1

  • Internal Accounting structures will match production costs to revenues in more detail and perfection than any contemporary Cost Accounting system.
  • Internal Accounting structures will match production costs to revenues in more detail and perfection than any contemporary Cost Accounting system.
  • Internal Accounting is designed to interface with any standard external accounting system. With the exclusive account-data architecture of Internal Accounting, you can quickly receive more detail and more accuracy in reporting your own internal accounting activities.
  • Internal Accounting is developed in a separate structure from General-Financial (External) Accounting. No mixture of Internal accounts with External accounting values - as is customary today, by trying to develop managerial accounting within the framework of Financial accounting.

For you to better understand what we refer to as a separate Internal Accounting structure, let us first study the graphic shown in Professor R. Anthony’s Cost accounting books.

Exhibit 1 is a rare example, printed in a Cost Accounting book that shows the basic idea of having the production accounts separated from the financial accounts. We can see how Professor Anthony identifies the accounts to the left as those related to Acquisition. These are accounts that refer to Assets, Liabilities and Expense. But there are NO detailed expense accounts – because these accounts are included in the Overhead account.
It is a mishap to have the expense accounts covered by an account called Overhead. In reality companies do not open Overhead accounts in their General Ledger – but have only accounts with expense denominations.
In this Exhibit we observe Sales accounts on the right, accounts referring to sales and administrative expenses, and also Asset accounts ( Accounts Receivable).
This is an unpleasant mixture of accounts.
In this presentation, notice that Professor Anthony has opened in the center of this exhibit, a group of accounts that he called “Production”.
Here is opened just a single production cost account, identified as the Work in Process Inventory account. Only the debit half of the Finished Goods Inventory account, is placed in this Production group of accounts, as if it should also belong to this group of accounts.
What we learn from this presentation, is the important basic idea of dividing the total Chart of Accounts into three separate parts.

Our Internal Accounting structure has just such a three-fold division of groups of accounts. However, we have developed a very detailed and precise configuration.

Let’s examine the next exhibit carefully.

Exhibit 2

Here is the basic Managerial Accounting model. As if looking from above on the building, we see the outer walls and two internal walls, which divide the total structure of our company into three parts.

The left part of this structure refers to the External Activities: we have a door in the wall through which our workers enter and their payments go out. Purchase material goes in, and payments go out.

These transactions correspond to External Accounting – our Financial Accounting.

The same type of structure with a wall to outer world, we have on the right side of this presentation. Through this door in the wall, our sold production (or service) is leaving our company and payments for these sales are coming in. Again, these transactions correspond to the External-Financial Accounting. Between these two parts we have structured a totally new perception:

Internal Accounting: the Chart of Accounts for our Internal Managerial activities.

Amounts recorded in these Internal Accounts will reflect the relevant time period (accrual) and associated internal activities. Transfers from these accounts to Financial (External) Accounting—such as finished goods inventory—will ensure accurate financial reporting. The resulting unit and total production costs will provide the most precise assessment of our production or service expenses.

Internal Accounting requires a well-defined account structure, categorizing the following specific classes of accounts:

  • Cost Elements
  • Departmental Operating Cost
  • Functional Activities
  • Cost of Goods Sold

Keep in mind the basic statement about activities registered in accounting:

The activity of: Purchases + Production + Sales = Profit

For purposes of discussion, we have prepared the next three graphics. The first is showing us the very well known structure of Financial Accounting.

Exhibit 3

Exhibit 4

Notice the transactions are realized using the different T-accounts. These amounts normally move from Credit to Debit in the chosen accounts.
This following graphic is much more interesting – it presents the basics for a separate Internal Accounting configuration.
The T-accounts are showing us, that from the Credit of the Cost Element accounts, we allocate these values to three different Classes of Accounts.
First allocation will go to the debits of the Cost Centers Class of Accounts ( to the Department).
Second allocation will be taken to the debits of the Production Cost Class

Third allocation will be debited the Cost of Goods Sold Class of accounts.

This section examines the fundamental rationale behind the allocation structure within Internal Accounting, outlining its principles and operational logic.

  • Step 1: If the amounts that we have credited our Cost Elements Class accounts are identified as Indirect Production Cost, we will have to allocate these values to the debit of the Cost Centers Class.
  • Step 2: If the amounts in the Cost Elements Class can be identified as Direct Production Cost, we will have to allocate these values directly to the debit of the Production Cost Class.
  • Step 3: In the Cost Elements Class of accounts we will also have the amount of our products sold. Consequently these amounts must be allocated directly to the debit of the Cost of Goods Sold Class.

It is essential to thoroughly understand these basic allocation transactions, as they correspond to our Internal Accounting framework. Readers will recognize that numerous accounts exist within these identified Classes, along with additional transactions that are not covered in this discussion.

Please review the next graphic:

Exhibit 5

Exhibit 6

Here, we outline the fundamental approach to integrating the Internal Chart of Accounts into the broader Financial Accounting framework.

Let’s conduct a more in-depth examination of the newly developed External and Internal structure, exploring its implications, functionality, and integration.

We recommend first establishing the foundational details of this new concept to ensure clarity and structured understanding.

Here we have a relatively clear picture of the basic transactions flow within External and Internal Accounting.

Exhibit 7

EXTERNAL ACCOUNTING : (not all shown on the exhibit)
Transactions are commonly flowing from Credit of Liability accounts to the Debit of the Expenditures ( or Expense) or Assets accounts.
From the credit side of our Revenue accounts the transactions flow to the debit of some Asset account.
INTERNAL ACCOUNTING:
We begin with the Cost Elements accounts.

Since Expenditure (Expense) accounts have been debited with amounts aligned with External Accounting, Internal Accounting will begin by crediting the Cost Element accounts, ensuring proper allocation within the financial framework.

The total credited amounts in these Cost Element accounts must now be systematically allocated to their appropriate destination accounts, ensuring accurate cost distribution within the accounting framework.

This question of where these amounts belong – can be explained in following way:

Cost Elements are basically divided into following two groups:
  • Costs directly related to the Production - these are the Direct (Variable) Costs . All Direct Cost - will be allocated directly to the Production Cost, controlled by Job orders, or directly to the repair or internal construction accounts.
  • Costs directly related to the Production - these are the Direct (Variable) Costs . All Direct Cost - will be allocated directly to the Production Cost, controlled by Job orders, or directly to the repair or internal construction accounts.
  • Cost that are indirectly related to Production - these are the Indirect ( Fixed ) Cost.

All Indirect Costs will be assigned directly to the relevant Departments, which may include Administrative, Sales, Direct Production, Indirect Production, or Service Departments. This ensures proper cost distribution and alignment within the Internal Accounting structure.

See the detailed graphic presentation of the Internal Accounting structure. This is the new Chart of Accounts for Managerial Accounting – presented graphically.

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