How is simple interest different from compound interest?

Simple interest is characterized by the fact that it is calculated solely on the principal amount, which is the original sum of money invested or borrowed. This means that the interest does not consider any previously earned interest; instead, it is a straightforward calculation based on the initial investment.

In contrast to simple interest, compound interest involves calculating interest on both the principal and any interest that has already been added to the principal over time. This results in the potential for much larger amounts of interest accrued compared to simple interest, particularly over longer periods.

Therefore, the distinction lies in the fact that while simple interest remains constant based solely on the initial principal, compound interest can grow at an accelerated rate due to the accumulation of interest on interest. This highlights why the principle of simple interest only pertains to the principal amount, making the correct answer accurate regarding their differences.