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Matter consists of atoms and molecules, they are made up of particles having kinetic and potential energies. The internal energy of the system can be defined to be the sum of the kinetic energies of all the particles plus the sum of the potential energies arise from the interaction among these particles. Internal energy doesn't include potential energy of the system and it's surroundings, rising a glass of water placing it on a high shelf does increase the potential energy of the glass but has no effect on the internal energy of the system.