Background: DLco remains one of the most commonly performed tests in the pulmonary lab. An isolated reduction in DLco is a unique abnormality with specific differentials when evaluating a patient with dyspnea. There remains a significant misunderstanding amongst young pulmonologists and pulmonary trainees regarding DLco and its relationship with alveolar volume and kco. Objective: This review aims to provide a physiological basis for the DLco test and bust the myth of “DLco corrected for lung volume.” Method: A systematic review of the available literature regarding alveolar gas-exchange physiology, measurement methods of DLco, the interplay of different variables associated with it, and the causes of its reduction was performed. Focused physiological data were used to put together a comprehensive review of isolated reductions in DLco. The second part of this review addresses the critical and interdependent relationship between DLco and alveolar volume (VA). Results: DLco has a unique relationship with lung volume that needs to be considered while interpreting its value. Diffusion capacity per unit volume (kco) is an independent factor that, when combined with DLco and VA, helps accurately interpret the test and narrow down differentials. Conclusion: DLco is an extremely valuable test and an important prognostic tool in many patients with dyspnea. An isolated reduction in DLco is increasingly recognized these days as an early marker of detection for various pulmonary parenchymal and vascular diseases. A detailed physiopathological explanation, followed by the proposed algorithm, should help pulmonary physicians and trainees understand and implement DLco’s relationships in their daily patient care.