I initially thought it was exclusively for official libraries like the support library. However any time I add a custom JAR using the "Add to build path" menu item, it automatically shows up in both "Referenced Libraries" and "Android Private Libraries". One of these is redundant since there is no point in exporting both at build time. Additionally, "Android Private Libraries" cannot be modified so I can't (easily) add java doc or source paths. Not to mention it just seems wrong that a custom JAR is in "Android Private Libraries".
I cannot delete the entry from "Android Private Libraries" to use only "Referenced Libraries" either.
In my case i always add libraries to libs folder.
According to my understanding thats the way its suppose to be. Android Private Library folder references these jars in libs folder. The Android Private Library is used during the creation of apk (probably during the conversion of your java code into dex file).