What is the difference between an asset and a liability?

The distinction between an asset and a liability is fundamental in financial literacy, and choice B accurately captures this difference. An asset is anything that a person or organization owns that has economic value, which can provide future benefits or generate cash flow. Examples of assets include cash, real estate, stocks, and equipment. These items contribute positively to an individual's or a company's financial health.

On the other hand, a liability represents an obligation or debt that a person or organization owes to another party. Liabilities can include loans, mortgages, credit card debts, and any other financial obligations. Their existence means that there is a claim against the asset's value, requiring future sacrifices of economic resources.

Understanding this difference is crucial for budgeting, financial planning, and evaluating one's overall financial status. Clear differentiation helps individuals manage their finances effectively by recognizing what they own versus what they owe.