What is the difference between GAAP and 704 (b)?

GAAP or Generally Accepted Accounting Principles show business transactions that are based on the rules set by the accounting board of a company. This is used by companies to determine the level or degree of consistency when it comes to financial statements so that proper investments can be made by the companies. This also helps stakeholders to know their level of participation. On the other hand, 704 (b) refers to the rules stated in section 704(b) in relation to certain economic practices.

The main function of 704 (b) is to reveal the economic effects on the resources being pulled together among partners. These rules state that capital accounts should not be part of tax or GAAP. As a result, profits or proceeds from investment must be distributed based on the amount contributed by each partner. In contrast, proceeds are distributed based on the profits and losses of a business.

Accounting for business transactions is crucial for smoothly running a business. If you are not organized and informed on how to maintain your books, you may not be able to present information to people associated with business success. There are many instances that partnership businesses and limited liability companies that are taxed as a partnership business, in which you are asked to keep two types of books. One book is maintained based on Generally Accepted Accounting Principles (GAAP), and the other one is based on a tax basis.

Businesses impose GAAP to bring a minimum level of consistency in financial statements, which will assist in the investigation of these companies to turn a profit. Unlike 704 (b), under the GAAP accounting methods, permits them to document their own when a new person comes in. 74 (b), on the other hand, 704 (b) books aim to divulge the considerable economic effect of the allocation among partners.