mSCOA Segment Classification Explained: Project, Fund, Function, Item, Region, Costing

Getting segment classification right is one of the most practical skills for municipal finance teams. The Municipal Standard Chart of Accounts (mSCOA) requires every material transaction to be tagged across six core segments so that National Treasury, the Auditor-General, and your own council can see exactly what was spent, where, and for what purpose. This mSCOA segment classification guide breaks down each segment — Project, Fund, Function, Item, Region, and Costing — with clear definitions, structure, and examples so you can classify transactions correctly and avoid the classification errors that frequently appear in Auditor-General reports. For the broader framework, see our mSCOA chart of accounts guide and the plain-language introduction to mSCOA.

1. Project Segment

Purpose. The project segment identifies the specific project (if any) to which a transaction relates. It answers: “Is this revenue or expenditure tied to a defined project, and if so, which one?” Not every transaction has a project code; only those linked to a capital project, a grant-funded programme, or another defined project require it. Using the project segment correctly is essential for conditional grant reporting, infrastructure programme tracking, and audit evidence that expenditure was used for the intended purpose.

Structure. Projects are typically split into capital projects (e.g. a new reservoir, a road upgrade, a fleet replacement) and operating activities that are project-coded (e.g. a time-bound capacity-building programme funded by a specific grant). National Treasury and your municipality’s project register define the valid project codes. Each project should have a unique code, a clear description, and (where applicable) a link to the grant or budget vote that funds it.

How to set up project codes. Maintain a project register that lists every active project, its code, name, fund source, and function. When a new capital project or grant-funded programme is approved, add it to the register and ensure the code is available in your general ledger or municipal software. Train budget and finance staff so that when they capture payments or receipts related to that project, they select the correct project code. Omitting the project segment for conditional grant expenditure is a common cause of AG findings.

Examples. Payment to a contractor for work on “Ward 3 water pipeline upgrade” → Project = the code for that capital project. Receipt of a conditional grant for “Municipal Infrastructure Grant — water” → Project = the MIG water project code. Salaries of staff employed full-time on a specific infrastructure project → Project = that project’s code. General administration salaries not tied to any project → Project = blank (or your municipality’s “non-project” code if you use one).

2. Fund Segment

Purpose. The fund segment indicates which fund the transaction belongs to. Municipalities in South Africa often operate multiple funds: a general (operating) fund and ring-fenced funds for water, electricity, sanitation, and sometimes others. The fund segment ensures that revenue and expenditure are allocated to the correct “pot” so that each fund’s financial position and performance can be reported separately, in line with the MFMA and municipal finance policy.

Structure. Funds can be ring-fenced (e.g. water fund, electricity fund) where revenue and expenditure must stay within that fund, or general (operating fund) where there is no ring-fencing. Types of funds commonly used include: operating fund (general municipal operations); capital fund (where the municipality separates capital financing); conditional grant fund (or separate funds per major grant, depending on policy); unconditional grant fund (e.g. equitable share); and utility funds (water, electricity, sanitation). National Treasury’s mSCOA framework and your municipality’s fund policy define the exact list.

Examples. Water tariffs received → Fund = Water Fund. Payment for bulk electricity purchase → Fund = Electricity Fund. Salaries of corporate services staff (not allocated to a specific utility) → Fund = Operating Fund. Equitable share received → Fund = Operating (or Unconditional Grant Fund per your structure). Conditional grant received for a specific project → Fund = the fund designated for that grant (e.g. MIG fund). Recording revenue or expenditure in the wrong fund distorts fund statements and can breach ring-fencing rules; correct fund classification is mandatory for MFMA and mSCOA compliance.

3. Function Segment

Purpose. The function segment describes what service or activity the transaction relates to. It answers: “Which municipal function or service area does this revenue or expenditure belong to?” Correct function classification is essential for segment reporting in the annual financial statements, for answering questions such as “how much did we spend on water?” or “what was our revenue from waste management?”, and for holding the right department or function accountable.

Structure. Functions align with the standard list of municipal functions published by National Treasury. Typical categories include: governance and administration (council, municipal manager, corporate services, finance); community services (housing, libraries, cemeteries, community development); planning and development (town planning, land use, economic development); health (environmental health, clinics where applicable); public safety (fire, disaster management, traffic); sport and recreation; environmental protection; waste management; water; sanitation; electricity; roads and transport; and other as defined in the mSCOA function list. Your chart of accounts and reporting must use the same function codes as National Treasury so that data is comparable across municipalities.

Examples. Salaries of water treatment plant staff → Function = Water. Payment for refuse collection vehicles → Function = Waste Management. Rates and taxes (property rates) → often Function = Governance/Administration or as per your policy for “general” revenue. Grant received for road construction → Function = Roads and Transport. Legal fees for a planning appeal → Function = Planning and Development. Misclassifying function (e.g. coding water expenditure under Administration) distorts segment reports and is a frequent source of material misstatement findings.

4. Item Segment

Purpose. The item segment describes the nature of the revenue or expenditure. It answers: “What type of income or expense is this?” — employee costs, bulk purchases, depreciation, grants received, rates, interest, and so on. The item segment is one of the most detailed in mSCOA; National Treasury’s item classification is extensive so that comparable data can be collected across all municipalities. Errors here (e.g. recording ICT expenditure under the wrong item or not at all) regularly lead to zero or nonsensical line items in the AFS and to AG findings.

Structure. Items are structured by revenue items (e.g. rates and taxes, service charges, grants received, interest, other income), expenditure items (e.g. employee costs, bulk purchases, materials, contracted services, depreciation, interest, grants paid), asset items (for balance sheet classification), and liability items. Each category has a hierarchy of codes; for example, under employee costs you may have salaries, overtime, leave pay, medical aid, pension contributions, and other sub-items. Use the current National Treasury item list and ensure your general ledger or municipal software uses the same codes.

Examples of common item codes. Employee costs (salaries and wages); bulk electricity or bulk water; materials and consumables; contracted services (e.g. legal, audit, maintenance contracts); depreciation; interest paid; grants received (conditional, unconditional); rates and taxes; service charges (water, electricity, refuse, sanitation); interest received. For a payment to an ICT vendor for software licences, the item must be the correct mSCOA item for ICT/software expenditure — using a generic “contracted services” code without the right sub-classification has led to municipalities reporting zero ICT spend in the AFS. For more on typical mistakes, see common mSCOA classification errors.

5. Region Segment

Purpose. The region segment (or geographic segment) identifies the geographic area to which the transaction relates, where your municipality reports by geography. It answers: “Which ward, district, or area does this apply to?” Not every transaction requires a region code; it depends on your municipality’s reporting requirements and the nature of the transaction. Where region reporting is required — for example for ward-level expenditure or for grant reporting by area — incorrect or missing region codes affect the accuracy of geographic reports and can affect compliance with grant or allocation conditions.

Structure. Region codes typically align with wards (electoral wards), or with larger geographic units (e.g. district, zone) as defined in your municipality’s structure. National Treasury may provide guidance on region coding; otherwise your municipality defines the list. Each ward or region has a unique code. Revenue and expenditure that can be attributed to a specific area (e.g. ward-based project expenditure, area-specific service costs) should be coded to that region.

Examples. Expenditure on a ward-based road repair project → Region = the ward code. Water revenue from meters in a specific zone → Region = that zone’s code (if you report revenue by region). Corporate head office salaries that cannot be attributed to a single ward → Region = blank or “unallocated” per your policy. Where region is mandatory for certain transaction types, ensure all such transactions are coded consistently.

6. Costing Segment

Purpose. The costing segment supports cost allocation and activity-based costing. It answers: “Which cost centre or activity should this cost be attributed to?” It helps municipalities understand the true cost of delivering specific services (e.g. water treatment, refuse collection) and supports budgeting, tariff setting, and cost recovery analysis in line with the MFMA and municipal finance policy.

Structure. Costing codes represent cost centres, activities, or programmes. They can align with departments, plants (e.g. water treatment plant, wastewater works), or processes. The segment is used to allocate both direct costs (clearly attributable to one cost centre) and indirect costs (e.g. shared IT, finance, or administration costs that are allocated using a basis such as headcount or floor space). National Treasury and your municipality’s costing policy define how indirect costs are allocated; the costing segment holds the result of that allocation.

How to allocate indirect costs. Define an allocation basis (e.g. percentage of direct costs, number of employees, service units) and apply it consistently. When a cost is incurred that cannot be assigned directly to one cost centre, allocate it using the agreed basis and post it to the relevant costing segment(s). Document the methodology so that it is auditable. Misuse or omission of the costing segment makes it harder to demonstrate cost recovery or to justify tariffs and subsidies.

Examples. Direct labour at a water treatment plant → Costing = Water treatment plant. Bulk chemical purchase for the same plant → Costing = Water treatment plant. Portion of IT costs allocated to the water function → Costing = Water (or Water IT allocation). Corporate finance costs allocated to all functions → Costing = each function’s cost centre according to your allocation schedule.

Worked Example: How to Classify a Water Infrastructure Project

Suppose your municipality pays a contractor R 2,5 million for work on a water pipeline upgrade in Ward 5, funded by the Municipal Infrastructure Grant (MIG).

• Project: The code for the “Ward 5 water pipeline upgrade” capital project (from your project register). This links the payment to the correct MIG project for grant reporting.
• Fund: The fund designated for MIG or water capital (e.g. Capital Fund or MIG Water Fund, per your policy). This keeps grant-funded capital separate from operating or other funds.
• Function: Water. The pipeline is water infrastructure, so the function is Water.
• Item: The correct expenditure item for capital work — e.g. “contracted services” or “capital expenditure — infrastructure” under the current mSCOA item list. Do not use an operating expense item.
• Region: Ward 5 (or the region code for the pipeline area). This supports geographic and ward-level reporting.
• Costing: The cost centre for water capital projects or for this specific project, per your costing structure. This allows you to track total cost of the project for reporting and reconciliation.

Every segment is populated in a way that allows National Treasury, the AG, and your council to see that the payment was for a water project in Ward 5, funded from the correct fund, and classified under the correct item and cost centre. Software that pre-configures these segments and validates classifications reduces the risk of omitting or misclassifying one of them.

Worked Example: How to Classify a Staff Salary Payment

Suppose you pay the monthly salary of a community services department employee. The salary is not linked to any specific project and is paid from the operating fund.

• Project: Blank (or “non-project”). The salary is not tied to a capital project or grant-funded programme.
• Fund: Operating Fund. General staff costs are typically in the operating fund unless the person is wholly charged to a ring-fenced fund (e.g. water fund employee).
• Function: Community Services. The employee works in that department, so the function matches the service area.
• Item: Employee costs — with the correct sub-item for basic salary (or the appropriate item for salaries and wages per the mSCOA item list).
• Region: Blank, or the region code if your municipality allocates staff costs by ward/region (e.g. for a ward-based officer). Many municipalities leave region blank for central administration salaries.
• Costing: Community Services cost centre (or the specific activity/cost centre for that employee). This ensures the salary is included in the cost of delivering community services for tariff and performance reporting.

Consistent application of these six segments for salaries ensures that employee costs appear correctly in the AFS by function and fund, and that cost centres reflect the true cost of each service. For more on the full chart of accounts and validation, see the mSCOA chart of accounts guide.

Getting Segment Classification Right in Practice

Segment classification is only as good as the discipline behind it. Use a mapping document that links your chart of accounts (or your municipal software’s account structure) to the mSCOA segments and code lists. Train everyone who captures or approves transactions on the six segments, with examples from your municipality. Run periodic checks for invalid or inconsistent combinations — for example, water revenue in the operating fund, or project expenditure without a project code — and correct them before they reach the AFS.

Municipal software that is built for South African mSCOA compliance can make a significant difference. Dolobha pre-configures the mSCOA segment structure (Project, Fund, Function, Item, Region, Costing) and validates classifications at capture: mandatory segments are enforced, invalid code combinations are blocked, and reports and Section 71 submissions are generated from the same classified data. That reduces the classification errors that lead to material misstatements and AG findings, and frees finance teams to focus on analysis and decision support. For a full picture of mSCOA and MFMA obligations, use our what is mSCOA plain-language guide, the mSCOA chart of accounts guide, and the article on common mSCOA classification errors. If you are evaluating systems for your municipality, explore Dolobha to see how segment classification can be built into your daily processes from the start.