Messages from the simulated computer appear in the console window when an assembly program that is running (in simulation) writes to the (simulated) monitor. If a real MIPS computer were running you would see the same messages on a real monitor.
Messages from the simulator are anything the simulator needs to write to the user of the simulator. These are error messages, prompts, and reports.
Now that the simulator is running you need to assemble and load a program. Depending on the settings of the simulator, there already may be some machine instructions in simulated memory. These instructions assist in running your program. If you start the simulator from the Simulator menu this code will run, but it will be caught in an infinite loop. To stop it, click on Simulator; Break.
A source file (in assembly language or in any programming language) is the text file containing programming language statements created (usually) by a human programmer. An editor like Notepad will work. You will probably want to use a better editor, but as a common ground I'll use Notepad. (I like the freeware Crimson Editor by Ingyu Kang, but any text editor will be fine). Use whatever editor you use for your usual programming language.
(Review) What type of files does Notepad create?