3. Shareholder's Equity

Let's take a look at shareholders' equity. So owner's equity, shareholders' equity, same thing, both work. And owner's equity is over here as a part of the accounting equation. Assets equals liabilities plus owner's equity. And we've looked at these in a different video, so now we're gonna focus primarily on owner's equity and try to figure out what it is. So owner's equity is made up of two pieces.

You've got one called retained earnings, and the other is called contributed capital. Let's take a look at retained earnings first. So what does retained earnings mean? Well, words have meaning, so these are the earnings that we have retained, right? These are the earnings that we have kept. You can think of this as kept earnings, earnings that we've held on to.

So the formula for this is pretty simple. What we're looking for is how much of our earnings did we hang on to? So our earnings can also be called our net income. And then we need to know how much of our net income did we hold on to? Well, the thing that we give away out of our net income is called dividends. We give away money to shareholders. So that's money given away. We pay dividends out to shareholders. So net income minus dividends gives you your retained earnings. Think of it this way. If you made $100, so you earned 100 bucks, then you gave away $10 to your church.

So you gave away $10. The money that you kept would be 90, and this would be your retained earnings, right? How much of your earnings did you retain? Well, at the end of the day, you still have $90, so that's called your retained earnings. And that's exactly what we're dealing with here. We have our net income, and then we give some of it away back to the shareholders. And so at the end of the day, our retained earnings is how much of our net income we didn't give away. How much did we retain? And so this is how you get retained earnings for a single year.

You say, "How much money did I make this year? How much did I give away this year? That's how much I retained this year." But retained earnings looks a little bit more like this. You have your beginning balance, then you add in your net income, take out your dividends, and then you have your ending balance.

So you can see it's the same equation here. We're just adding in the beginning balance and calling it the ending balance when we're done. And the beginning balance is always gonna be zero for the first year. So if you see a problem that says, "Well, the company's first year of operations, they made $1,000 and gave away $100 in dividends," you know for sure that the beginning balance is zero because you can't retain anything if you've never earned anything, right? So you can't have any retained earnings from the prior year if this is your first year in business because you've got beginning plus net income minus dividends equals ending.

And then the next year, so let's say this is Year X, this is Year X plus 1, this ending balance comes up to be your beginning balance for the next year. You do your thing, ending, and this becomes your beginning balance for the next year. So the point is, if you see a question that says first year of operations, you can always put zero as your beginning balance. So that's retained earnings. What about this contributed capital business? So if you think about retained earnings as money we made and kept, then contributed capital would be money that someone else gave us.

So think about contributed capital as money that was given to us, and this could be given to us by the founder of the business. This could be by other people who want to buy into the business. That's why I said you can see owners' or you can see shareholders' equity, because shareholders are owners of the company, and the owners own shares in the company. So these two terms are interchangeable. So retained earnings is money that we made that we kept. Contributed capital is money that people put into the company, so money that someone gave the company in exchange for a piece of ownership. So if you ever watch Shark Tank, when Mark Cuban says, "I'll give you $100,000 for 30%," he is contributing capital, and so that would go over here in the owner's equity bucket.