What type of interest is described as being earned on both principal and previously accrued interest?

The type of interest that is earned on both the principal amount and previously accrued interest is known as compound interest. This means that interest is calculated on the initial principal as well as on the interest that has been added to the principal over time.

This method of compounding allows for greater accumulation of wealth, as the interest earned in each period is reinvested and itself earns additional interest in future periods. This is fundamentally different from simple interest, which is calculated only on the principal.

In financial contexts, understanding compound interest is essential because it reflects the true earning potential of an investment over time, which is crucial for both borrowers and investors. The effect of compounding can significantly impact financial growth, especially when considering investments over a long period.