Which statement best describes the difference between assets and liabilities?

• A. Assets are obligations of the company; Liabilities are resources.
• B. Assets are owners’ claims to future cash flows; Liabilities are equity.
• C. Assets are resources controlled by the entity with future economic benefits; Liabilities are present obligations arising from past events.
• D. Assets are cash on hand only; Liabilities are taxes payable only.

Answer: (C)

Assets are resources controlled by the entity that are expected to bring future economic benefits, while liabilities are present obligations arising from past events that will require the entity to sacrifice resources. This distinction is exactly what the statement conveys: assets provide future benefits, liabilities are obligations the entity must settle. Examples help: assets include cash, accounts receivable, inventory, and equipment; liabilities include notes payable, accounts payable, and taxes payable. Equity represents owners’ claims to residual interests, not assets.