CRM 2016 Online Update 1 introduces new entity called Category.
We can define Parent Category and Child Categories.
Category Number format can be defined in Auto Number settings.
For Category entity we can create 1 – N relationships with System Entity and Custom Entity and then associate their records with the categories. We cannot create N – 1 and N – N relationships from Category.
To associate category, I have created a new 1 – N relationship between Category and Account and added the lookup to the Account form.
This way category entity can help in grouping, search and reporting.
Hope it helps.