Assets are what the firm owns. Liabilities Liabilities represent sacrifices of service potential or future economic obligations. Money borrowed from the bank is a liability. If we purchase goods on credit from other firms we incur a liability. The amount of a liability is normally fixed by contract, and must legally be paid regardless of whether our firm makes a profit.
Liabilities are what the firm owes to outisders.
Owner s Equity Owner s Equity represents the owner s stake in the business. It is what is left over after subtracting liabilities from assets. Owner s Equity is thus the residual of Assets less Liabilities - What the Business Owes to Owners. The amount of owner s equity is not a fixed claim like in the case of liabilities. The owner s claim is simply what would be left if all liabilities were settled.