Q20RQ - Horngren'S Financial And Managerial Accounting

Question

How does compound interest differ from simple interest?

Step-by-Step Solution

Answer

In the simple interest, interest is calculated on the principal amount only. On the other hand, compound interest is calculated on principal and all previous interest.

Step 1: Definition of the interest

Interest is the amount an investor earns on the investment.

Step 2: Difference between compound interest and simple interest

Simple interest is one of the easiest methods to calculate the interest in this. Interest is calculated by multiplying principal, interest rate, and period. Compound interest is the interest calculated on the compound value or sum of interest and principal amount.