"Categorising" is a decision-making process in which the bookkeeper or accountant decides the most appropriate account to record each and every item of expenditure or income.
Supposing a sport club buys 5 litres of paint, how is this recorded in the club's accounting system? There are many possibilities.
Should the club's treasurer or bookkeeper create an expenditure account for PAINT? Should this paint expenditure be recorded as MAINTENANCE, if it was used on the clubhouse? If the club is a football club, and the paint was used to mark lines on the playing field, should it be recorded as FOOTBALL PROGRAM EXPENSES?
In another example, supposing a club sells a football shirt. Should this item of income be recorded as SALE of SHIRTS, or CLOTHING SALES, or SALES, or FUNDRAISING, or FOOTBALL INCOME. As you can see there are many possibilities.
All of these questions are the province of categorisation. The club's bookkeeper must decide the account to which each item of expenditure, and each item of income is put. The club's bookkeeper must essentially categorise each transaction and determine what is the most appropriate account for the income or the expenditure.
A large number of accounts might provide a potential for highly detailed information in the financial reports but in reality highly detailed information is not needed. Imagine that you are a committee member sitting around the table at a committee meeting and you are listening to the Treasurer's report. Do you really need to know, or are you really interested in knowing how much was spent on PAINT? The answer is NO! It is likely, however, that you may be interested to know how much in total was spent on clubhouse maintenance, or whether the football program is making a profit.
It is therefore a good idea, when categorising, to envisage a small number of accounts and to err towards simplified information, rather than highly detailed information. If anyone want to know exactly how much was spent on paint on the clubhouse, the treasurer or bookkeeper can go back and interrogate the financial database and find the answer. But this will only happen, very rarely.
Instead of worrying about providing a high level of detail in the accounts, it is much more important to worry about consistency. The bookkeeper needs to be consistent in their approach to categorising items of income and expenditure so that the committee, over a period of time, can obtain a picture of how the organisation various programs are operating financially.