Final answer:
Simple interest is calculated solely on the principal amount of money borrowed or invested according to the formula: Interest = Principal × rate × time. Compound interest, in contrast, accounts for both the principal and accumulated interest.
Step-by-step explanation:
Simple interest is only calculated on the principal amount, which is the original sum of money borrowed or invested. Unlike compound interest, which calculates interest on both the principal and accumulated interest, simple interest does not consider the interest that has previously been added to the principal.
To calculate simple interest, you can use the formula: Interest = Principal × rate × time. For example, if you deposit $100 at a simple interest rate of 5% for 3 years, the calculation would be $100 × 0.05 × 3 = $15, making the total amount $115 ($100 principal + $15 interest).