In accounting, what is meant by liabilities?

Introduction / Context:
When studying the basic elements of financial statements, it is essential to understand the meaning of assets, liabilities, equity, income and expenses. Liabilities are one of the core building blocks of the balance sheet. This question tests whether you can correctly define liabilities and distinguish them from assets, owner's equity and profit, all of which are different components of the financial position of a business.

Given Data / Assumptions:
- The term being defined is liabilities. - Options mention resources owned, obligations to outsiders, owner's investment and profit for a period. - We assume a standard financial accounting framework such as generally accepted accounting principles. - We must choose the option that best describes liabilities.

Concept / Approach:
In financial accounting, liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. In simpler terms, liabilities are amounts the business owes to external parties, such as suppliers, lenders, employees and tax authorities. These obligations will be settled in the future through payment of cash, transfer of other assets or provision of services. Assets are resources owned or controlled by the business. Owner's equity, or capital, is the residual interest in the assets after deducting liabilities. Profit is the excess of income over expenses for a specific period, not an obligation to outsiders in itself.

Step-by-Step Solution:
Step 1: Recall the basic accounting equation: Assets = Liabilities + Owner's Equity. Step 2: Recognise that liabilities are on the credit side of this equation and represent what the business owes to others. Step 3: Compare each option with this understanding. Only one option describes amounts owed to outsiders that must be settled in the future. Step 4: Eliminate options that describe assets (owned resources), owner's investment (equity) or profit (a performance measure), as they do not match the concept of obligations.

Verification / Alternative Check:
Look at examples: accounts payable, bank loans, outstanding wages, taxes payable and bonds payable are all liabilities. In each case, the business has a present obligation to another party. On settlement, cash or other resources will leave the business. These examples clearly fit the chosen definition and do not match the idea of assets, equity or profit, confirming that liabilities are obligations to outsiders payable in the future.

Why Other Options Are Wrong:
Resources owned and controlled by the business: This describes assets, such as cash, inventory, equipment and buildings. The owner's investment in the business: This is equity or capital, reflecting the residual interest of owners after liabilities are deducted. The profit earned during an accounting period: Profit is part of retained earnings and measures performance, not obligations to outsiders.

Common Pitfalls:
Students sometimes confuse liabilities with expenses because both involve payments. An expense is recognised when resources are consumed to generate revenue, while a liability continues to exist on the balance sheet until it is paid. Another common mistake is to think that owner's equity is also a liability. While the business entity concept treats owners as separate from the business, in accounting presentation, equity is shown separately from liabilities.

Final Answer:
The correct option is Obligations of the business to outsiders that must be settled in the future, because this statement accurately summarises the formal definition of liabilities in financial accounting.