How does the declining balance rate method of depreciation work?

The declining balance rate method of depreciation is based on the principle that an asset loses value at a consistent percentage rate over time, rather than a fixed dollar amount. With this method, each year the asset's book value is reduced by a specified percentage, which means that the actual dollar amount of depreciation will vary as the asset's value decreases.

For example, if an asset has an initial value of $10,000 and is subjected to a depreciation rate of 20%, the first year's depreciation would be $2,000, resulting in a new book value of $8,000. In the second year, the 20% depreciation would be applied to this new value of $8,000, leading to a depreciation of $1,600, and so forth. This creates a scenario where the dollar amount of depreciation declines over time, while the percentage remains constant throughout the asset's useful life.

In essence, the key feature of the declining balance method is its emphasis on percentage depreciation which reflects the principle that an asset tends to lose a higher amount of its value when it is newer, and the rate of depreciation slows down as the asset ages. This method is particularly relevant for assets that experience rapid initial depreciation, such as vehicles and technology.