Legal Definitions - declining-balance depreciation method

The declining-balance depreciation method is a formula used to estimate the wear, use, or obsolescence of an asset over its useful life. This method is useful in calculating the allowable annual tax deduction for depreciation.

For example, let's say a company purchases a machine for $10,000 with a useful life of five years. Using the declining-balance depreciation method with a rate of 40%, the first year's depreciation would be $4,000 (40% of $10,000). The second year's depreciation would be $2,400 (40% of the remaining $6,000), and so on.

This method allows for larger deductions in the earlier years of an asset's life and smaller deductions in the later years, reflecting the asset's decreasing value over time.