In the declining-balance method, what is the basis for calculating annual depreciation?

In the declining-balance method of depreciation, the calculation for annual depreciation is based on the book value of the asset at the beginning of each accounting period. The book value is the asset's cost minus any accumulated depreciation. This approach allows for a higher expense in the earlier years of the asset’s life, reflecting how many assets lose value more rapidly at the beginning of their useful life.

By using the book value, the depreciation expense decreases over time as the book value itself declines. This is in contrast to methods that use the original purchase price or market value, which do not accurately reflect the asset's current worth or usage. The replacement cost is also not used in this context, as it measures what it would cost to replace the asset rather than its existing depreciated value.

Thus, the reliance on book value aligns with the principle of matching expenses to revenues, providing a better representation of the asset's diminishing usefulness and financial impact on the business over time.