Disability, characterised by the loss of ability to perform activities of daily living (ADL), is a defining feature of dementia that results in growing caregiver burden and the eventual need for alternative care or nursing home placement. Functional decline in patients with dementia can also result from causes other than dementia, such as comorbid medical and psychiatric illnesses and sensory impairment. ADL consists of instrumental ADL (IADL) [complex higher order skills, such as managing finances] and basic ADL (BADL) [self-maintenance skills, such as bathing]. Assessment of IADL and BADL is recommended to establish a diagnosis of dementia. Functional assessment also helps the healthcare provider to offer appropriate counselling regarding safety concerns and need for custodial care. Functional capacity measures have been used increasingly in pharmacological trials of patients with Alzheimer's disease (AD) and related dementias, although at the present time these measures are generally not primary outcome measures. Functional impairment is not a uniform construct; rather, it is multifaceted and can be measured with various clinical instruments. Many scales have been validated for use in patients with AD for characterising functional impairment and evaluating the efficacy of treatment. Research to date indicates that cholinesterase inhibitors have the potential for modest but meaningful beneficial effects on ADL in patients with mild-to-moderate AD. Memantine also has promising beneficial effects on functional abilities in persons with moderate-to-severe AD. Assessment of ADL as a primary efficacy measure using a validated scale that is non-gender biased and cross-nationally relevant is recommended in new treatment trials of patients with AD and related dementias.