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The Category section allows you to create divisions for your inventory. This allows you to group items by type, tax rate, split, resale percentage, etc.
It is always better to have too many categories at first than too few. You can merge your categories to reduce the number you have and the items will automatically have their category updated. However, if you want to add an additional category items will need to be manually recategorized.
Screenshot of Category Settings Location
Here's the different things you can do with a Category.