 Hello. In this discussion, we will discuss the discussion question of compare and contrast liabilities and equity. When considering an essay question like this, one approach to this type of essay question would be to first look at those two terms, those two terms of liabilities and equity, define those two terms as best we can, and then look for the similarities listing out the similarities and listing out the differences between these two concepts. Before we get into doing that, I do want to point out that when we are first learning accounting, we often don't really see the similarities between liabilities and equity. We see, you know, we have an idea of what those two terms are, but they're also, they're often not very linked in our minds. Later on, and I want to suggest that there are a lot of similarities between these two terms, and it's helpful to understanding the accounting process, the financial statements, and how to record financial statements to know what those similarities are. So let's start off with giving some type of description and definition of these two terms, liabilities and equity. First, we'll start with liabilities. Liabilities represents something that will be owed in the future due to a transaction that happened in the past. So something happened in the past, and we owe something in the future due to that past transaction. The most typical type of liability is accounts payable, that resulting from us purchasing something on account. So we're going to buy something, let's say supplies, on account, kind of like a credit card, and therefore we owe something in the future. Other types of activities that could happen when we have our adjusting countries, we could have had work that was done in the past, and have an employee's payable or wages payable, because we owe the work in the future. Note that it's not always money liabilities, we owe something in the future, and it could be something such as we have unearned revenue, meaning we got the money already, we don't owe the money necessarily in the future if we provide what we said we were going to do in terms of the work in the future. That's going to be the basic definition. Now note that there are some areas where it can be confusing what happened in the past, we're talking about contingent liabilities and things of that nature, but for this purpose, that's basically a sufficient definition, something happened in the past, a transaction, business transaction, which obligates us to owe something, either services typically or money in the future. What is equity? Equity, whether we talk about a sole proprietor or a partnership or a corporation, when considering equity as a whole, we're talking about the net value of the company, we're talking about assets minus liabilities of the company, the total equity in the company. We can also think of equity as what is owed to the owner of the company. So we can think about the owners, whether they be stockholders, whether they be partners, whether they be just one individual, as a total, as a whole, as of the entire equity section, then that equity is owed to the owner. So the net value, this of course would make sense in that the accounting or the business, whether it be a separate legal entity or just have a separate business assumption, we're typically going to, we are always going to as much as possible keep the business books separate than the personal books. And therefore, by its nature, we can think of the business as being like a separate thing, even if it's not a separate legal entity, even if it's not, in other words, a corporation. And we can think of it as a separate thing owning assets, and therefore, owning everything it owns to somebody, either a liability or in this case, we're talking about the net value, the equity. So how are these two terms related then? How are liabilities and equity related? How are they different? And again, I think most people starting off, we can kind of list out some of the differences and we tend to think, well, they're different. This is some thing we owe to other people and the equity represents kind of the book value of the company. But note that if we think about the company as a separate entity, then the liabilities and equity are the same in that they represent claims to the assets of the company. If we think about the right side of the accounting equation, total assets, that's what the company has. The liabilities and equity equaling total assets means that that's who the company owes those assets to, either a third party somebody, such as vendors or the bank or loan, something like that, or who are vendors, or we owe it to the owner. The difference is owed to the owner. So that's how we have that similarity. Whatever we have in assets, we've got $100 in assets and $60 of it is owed to liabilities and $40 of it is claimed by the equity. So it's really those claims to the assets of the business. That's what both liabilities and equity represent. That's why they're kind of on that same side of the one reason you can kind of think of why they're on the same side of the accounting equation, liabilities and equity equal total assets, liabilities and equity listing out the claims to those total assets by those individuals that have claims to those total assets. Also, you can be considered if you think why the liabilities and equities tend to have or do have mostly normal credit balances, whereas assets mostly have normal debit balances. So those are going to be some of the similarities between equity and liability. One, they're both on the right side of the accounting equation. Two, they both represent claims, one being a claim by third party and two being the claims by the owners of the corporation or the business, whatever type of entity, whether it be sole proprietor, partnership or corporation. What are going to be the differences then? The major differences, of course, is who has those claims to those assets of the company. Liabilities represent third party claims. They represent people that are not owners of the company claims to the liabilities of the company, whereas the equity section represents the owner's claims, whether those owners be stockholders, partners or just a sole proprietor within the business. So to wrap this up, in essence, if we're talking about an essay question, if we got a question, if we got a discussion question comparing the liabilities and equity, you first want to define those two terms. That's one, this is one approach, but you can first define those two terms. Here's the definition of liabilities, something that happened in the past that caused us to owe something in the future, business transaction in the past, causing a future obligation, not necessarily in terms of money, but some type of future obligation, is going to be the liability. Equity could represent the net value in the company, assets minus liabilities, the accounting equation in that format. One definition of what equity is also represents what is owed to the owner, the claims of the owner, and then think about those things that are going to be the same. They're on the same side of the accounting equation, liabilities and equity, and they both represent claims to the assets of the business, listing things that are different in terms of liabilities and equity. We know that they're both claims to those assets. However, liabilities are third party claims, claims by people other than the owners, and the equity represents claims to those assets by the owners.