What is the definition of a liability?

A liability is defined as an economic obligation owed to another party. This encompasses any debts or financial commitments that a business must fulfill in the future, such as loans, accounts payable, and other financial obligations. Liabilities are essential to a company's balance sheet as they represent claims against the company's assets, reflecting the ways in which the business funds its operations and investments.

For instance, when a company borrows money from a bank, that obligation is recorded as a liability. Understanding liabilities helps stakeholders gauge a company’s financial health, particularly in evaluating its ability to meet future obligations.

In contrast, the other choices describe different financial concepts: resources owned by a company characterize assets, while profit refers to the net income after expenses, and the calculation of total assets minus total revenues does not accurately reflect any standard financial definition. The focus on liabilities is crucial for assessing the company's leverage and overall financial stability.