Equity = Assets — Liabilities

[ Etymonline :]
early 14c., "quality of being equal or fair, impartiality in dealing with others," from Old French equite (13c.),
from Latin aequitatem (nominative aequitas) "equality, uniformity, conformity, symmetry; fairness, equal rights; kindness, moderation,"
from aequus "even, just, equal" (see equal (adj.)).
As the name of a system of law, 1590s, from Roman naturalis aequitas, the general principles of justice which corrected or supplemented the legal codes.

Why was 'equity' was adopted to describe this Difference? Wouldn't 'remainder' or 'balance' fit more?

What explains this semantic specialization of meaning to accounting? What semantic notions underlie the emboldened abstract nouns overhead, with 'Assets — Liabilities'?


Equity isn't the same as equality - although they come from the same root.

Equity in the financial sense comes from its legal usage in equitable as fair or just. The equity in your house is the bit that you have a legal right to, it is fair and just that this part is yours


I don't think the meaning of "equity" has changed when it is used in "home equity".

You need to understand what equity means in the financial sector. Equity is what you own as in equity partners. If there are five equal equity partners in a law firm, they will own 20% of the firm each.

In a limited liability company such as all the listed companies, it means

the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as shareholders' equity.


Let's say you bought a house worth $1,000,000 yesterday and you paid $300,000 out of your own pocket and borrowed $700,000.

Total assets (your house value, $1,000,000) = Equity ($300,000, your own money) + Liability ($700,000, debt)

In order to buy that house, you needed something that should make up for the deficit between the house price and the debt you could borrow. That's the equity.

As @JimMack points out in the comment, your equity fluctuates as the house price goes up and down and your equity could become zero or even negative if the house price goes down to or below $700,000.

  • 'Equity' isn't what you have personally invested but rather the difference between what you owe and what you could sell for. Equity can increase or decrease based on market value, and it can become negative, regardless of your initial investment. investopedia.com/terms/h/home_equity.asp – Jim Mack May 28 '16 at 17:09
  • @JimMack Well, that's why I used "yesterday" in the example. I just wanted to simplify the example. – user140086 May 28 '16 at 17:14
  • I assumed you knew that since we both cited the same source (-: I just wanted to clarify and I appreciate the edit. – Jim Mack May 28 '16 at 17:42

It is Sense 5 of the word equity in the OED.

The earlier senses relate to the notion of equity as an adjunct to law, and forming an essential part of jurisprudence in all English-speaking jusrisdictions. Sense 4a has relevance.

4a. In England (hence in Ireland and the United States), the distinctive name of a system of law existing side by side with the common and statute law (together called ‘law’ in a narrower sense), and superseding these, when they conflict with it. The original notion was that of sense 3, a decision ‘in equity’ being understood to be one given in accordance with natural justice, in a case for which the law did not provide adequate remedy, or in which its operation would have been unfair. These decisions, however, were taken as precedents, and thus ‘equity’ early became an organized system of rules, not less definite and rigid than those of ‘law’; though the older notion long continued to survive in the language of legal writers, and to some extent to influence the practice of equity judges. In England, equity was formerly administered by a special class of tribunals, of which the Court of Chancery was chief; but since 1873 all the branches of the High Court administer both ‘law’ and ‘equity’, it being provided that where the two differ, the rules of equity are to be followed. Nevertheless, the class of cases formerly dealt with by the Court of Chancery are still reserved to the Chancery Division of the High Court.

Following this principle - sense 5b relates the system of equity to a mortgagor.

5b. equity of redemption: the right which a mortgagor who has in law forfeited his estate has of redeeming it within a reasonable time by payment of the principal and interest. equity to a settlement: a wife's equitable right to have settled upon her any properties coming to her after marriage.

The foregoing is the history of the way in which the jurisprudential concept of equity became applied to the notion of ownership. A relevant example of its use is from 1966 and the Dictionary of Economic Terms:

1966 A. Gilpin Dict. Econ. Terms (1967) 72 Equities, the ordinary shares of a limited company. They carry the right to the residue of a company's assets after it has paid all its creditors, and share in the distribution of profits, if any, after interest has been paid to preference share-holders and debenture holders each year.

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