To compound means to add. So every time you earn interest on your deposit, your principal gets updated to the total sum at that point, therefore increasing it. Meaning that every cycle, you will get interest on this new amount.

Example:
For example, if you earned 50 rupees as interest on the 1000 rupees you deposited in January, in the next month you will earn interest on 1050 rupees,in March your principal amount will be 1100. Thus, by the end of two years you will be earning interest on 2200 rupees and not your initial 1000.