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I'm just going to speak at a very high
level here on the stock component

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of the equity section,
as it gets a little advanced.

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The equity section of a balance sheet
shows the different types of stock

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the company has issued and authorized,
as well as retained earnings.

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We'll elaborate more on what retained
earnings are later in this video.

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There can be a lot of detail in this
equity section that shows different types

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of common shares, par values,
paid in capital, and treasury stock.

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We're not going to get
into the details of that.

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Just know that in simplistic terms,

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this represents the share value
of a stocks when they're issued.

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For larger, publicly listed companies,

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you might see a lot of
different stock lines here.

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In startups and smaller companies,

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you'll likely see different line items for
series A, series B, etc.

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Then, there is another line item in
the equity section for retained earnings.

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Retained earnings are the amount of
net income the company has generated

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since inception that has been
reinvested in the business.

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So again, simple examples at a high level.

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But let's say the company has generated
a net profit of $100,000 this year.

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We decided to reinvest all of
that money in the business, so

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our retained earnings would be
increased by $100,000 this year.

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If we had lost $100,000 then our
retained earnings would decrease.

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And if we've never generated a profit,
this would be an accumulated loss or

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accumulated deficit instead
of retained earnings.

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If the company had issued some dividends
to shareholders, let's say $20,000

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in this year, then our retained
earnings would only go up by $80,000.

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So, when you sum up all these rows, that
gets you total shareholder's equity or

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the book value of
the equity of the business.

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If someone asks you how
much a business is worth,

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that's a potentially
difficult question to answer.

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It's a question about value which
can be nuanced and subjective.

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What is not nuanced or subjective.

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And a potentially good response if you're
not wanting to go down the path of a long

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conversation is to use the book
value of the business as a response.

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So if someone asked you, hey, what's
the value of this privately held business?

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One potential answer to the question is to
look at the balance sheet, find the total

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shareholder equity line, and tell them
the book value of this business is XYZ.