Depreciation expense in a not-for-profit organization should be:

• A. Capitalized to assets
• B. Assigned to or allocated to the functions to which it relates
• C. Reported only as a separate line item
• D. Expensed when incurred

Answer: (B)

Depreciation reflects the cost of using long‑term assets to deliver services, and in not-for-profit reporting, expenses are shown by function to show how resources support specific programs and activities. Because the asset’s use directly ties to particular functions, the depreciation expense should be assigned to the function(s) that benefit from the asset. This alignment shows the true cost of each function’s activities over the asset’s life and keeps the financial statements transparent about how resources are devoted to programs and supporting services. Depreciation is not added to asset values as a capital item, nor is it appropriate to report it only as a separate line or to expense it only when the asset is purchased; it must be allocated across the functions that utilize the asset over time.