How are liabilities defined in financial accounting?

Liabilities in financial accounting are defined as obligations or debts that a business owes to outside parties. This definition is pivotal because it highlights the requirement for a company to fulfill these financial commitments, which can arise from borrowing funds, purchasing goods or services on credit, or other financial agreements. Such obligations can be short-term, like accounts payable or long-term, like bonds payable, and they represent a claim against the company’s assets.

The understanding of liabilities is crucial for assessing a company's financial health. Liabilities indicate how much a business has financed through external means as opposed to its equity, which is capital supplied by the owners. Correctly identifying these obligations ensures that a business can accurately report its financial position and manage its cash flows effectively.

In contrast, the other options refer to different aspects of financial accounting. Investments made by owners refer to equity, revenue received in advance pertains to deferred revenue, and assets that generate income emphasize the resources of the business rather than its obligations. Recognizing each of these distinctions is fundamental in understanding the broader picture of a company's financial statements.