Difference Between Liabilities And Owner’s Equity

In order to make the difference between Liabilities And Owner’s Equity or Equity or Capital in case of Sole Proprietorship or Partnership Businesses, firstly, you must know about the term Equity which means that there are two types of rights or claims to the assets of the business of the company. Rights of Owners to the assets of the business are Internal sources of finance to the business and known as Owner Equity like Capital invested in the business and Rights of Outsiders are External sources of finance to the business and called Liabilities like Loan from Banks, financial institutions, etc.

Now come to our main topic. There are some main differences between Liabilities and Owner 's Equity

1. Liabilities are the rights of Outsiders while Owner Equity or simply Equity is the rights of the shareholders of the company. In case of Sole Proprietorship, it is the amount invested by the owner in the business to start it or to grow the business. He may invest either Cash or Goods (Purchases).

2. Creditors or Accounts Payable are not the owners of the company so they can not control the operations of the business. They can claim only the amount of credit. However, the company can grant some control under the credit terms and conditions. While shareholders are the owners of the business and they can control the operations of the business through Board of Directors. A sole owner himself can control the business i.e., he can invest or withdraw cash for personal use without any consent of others. However, in case of Partnership, it depends upon the mutual consent of each of the partners agreed on it.

3. Debts that categorized as Long-Term Liabilities are matured at the specific period of time but Owner Equity can not be matured.

4. The Outsiders have legal priority to claim their rights over the assets of the business in case of liquidation of the business. First Business must pay the full amounts of due to outsiders, then the firm can pay to the shareholders or owners.

So, after studying the difference between Liabilities and Owner’s Equity or Capital, now hopefully, you will be more clear about these and are able to understand this topic in a better way.