Declining capacity is when the amount of charge a battery can hold gradually decreases due to usage, aging, and with some chemistry, lack of maintenance.
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PDA batteries, for example, are specified to deliver about 100 percent capacity when new but after usage and aging and lack of conditioning a pda battery's capacity will drop. This is normal. If you are using a pda battery (or any lithium-ion or lithium-polymer battery) when your battery's capacity reaches 60% to 70% the pda battery will need to be replaced. Standard industry practice will warranty a battery above 80%. Below 80% typically means you have used the practical life of a battery. Thus the threshold by which a battery can be returned under warranty is typically 80%.