When reconstructing the income/expense statement, depreciation and debt service would be considered a/an _________ expense.

In the context of reconstructing an income/expense statement, categorizing depreciation and debt service as an “improper” expense reflects the understanding that these costs are not typically considered when evaluating the operational performance of a property.

Depreciation is a non-cash expense that does not represent an actual cash outflow during the accounting period. Similarly, debt service refers to the cost of servicing debt, including both principal and interest payments, which are influenced by financing decisions rather than the property’s operational efficiency. For this reason, including these items in an income/expense statement aimed at assessing the operational performance can lead to misleading conclusions about a property’s income-generating capabilities.

Operational expenses, while they pertain to the day-to-day functioning of a property, do not encompass these categories. Administrative expenses relate more to the management side rather than directly to property operation. Variable expenses typically fluctuate with the level of activity or production, but since depreciation is fixed over time and debt service is based on contractual obligations rather than variable activity, they do not fit this category either. Thus, describing these as “improper” highlights their misalignment with the typical intent of the income/expense statement focused on operational results.