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Horngren'S Financial And Managerial Accounting
Found in: Page 1464

Short Answer

How does compound interest differ from simple interest?


Simple interest is calculated on principle only whereas compound interest is calculated on both the principal and the previously accrued interest.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Simple Interest

The cost of borrowing is known as simple interest. Borrowers will benefit from specific interest since they will only be charged interest on the advances they have taken out. In other words, simple interest is the sum paid to a borrower for using borrowed reserves over a set period.

Step 2: The difference between compound interest and simple interest.

The term "simple interest" alludes to interest computed fair on the principal. Compound interest, on the other hand, is computed on both the principal and all previously earned interest.

Compound interest is based on the presumption that the interest earned will be reinvested and helps to create additional interest at the same rate.

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