---
title: Automatic Categorization
description: How Midday uses AI to categorize your transactions and how categories affect your metrics.
section: banking
order: 4
---

Every transaction that flows into Midday is automatically categorized using AI. This saves hours of manual work and keeps your books organized for accounting.

## How it works

When a new transaction arrives, Midday's AI:

1. **Analyzes the merchant**: Identifies the company from the transaction description
2. **Checks your history**: Looks at how you've categorized similar transactions
3. **Considers patterns**: Factors in amount, frequency, and context
4. **Assigns a category**: Picks the most likely category

The AI learns from your corrections. The more you use Midday, the more accurate it becomes for your specific business.

## Category structure

Midday uses a two-level category system designed for business accounting:

### Parent categories (14 total)

1. **Revenue** - Income from your business
2. **Cost of Goods Sold** - Direct costs of products sold
3. **Sales & Marketing** - Customer acquisition costs
4. **Operations** - Day-to-day running costs
5. **Professional Services** - External expertise
6. **Human Resources** - Team costs
7. **Travel & Entertainment** - Business travel
8. **Technology** - Software and subscriptions
9. **Banking & Finance** - Financial transactions
10. **Assets** - Capital purchases
11. **Liabilities & Debt** - Obligations
12. **Taxes & Government** - Tax payments
13. **Owner / Equity** - Founder transactions
14. **System** - Uncategorized and transfers

### Subcategories

Each parent category contains specific subcategories. For example, Technology includes:
- Software
- Non-Software Subscriptions

[See all categories and subcategories →](/docs/categories-reference)

## Excluded categories

Some categories are "excluded" from burn rate calculations to prevent double-counting:

| Category | Why it's excluded |
|----------|-------------------|
| Credit Card Payment | The purchases on your card already count; the payment would be double-counting |
| Internal Transfer | Moving money between accounts isn't spending |

This happens automatically. Your burn rate and runway calculations stay accurate.

[Learn more about how categories affect metrics →](/docs/understanding-metrics)

## Changing a category

If the AI gets it wrong:

1. Click on the transaction
2. Select the correct category from the dropdown
3. Save

### What happens when you correct

- The transaction is recategorized immediately
- The AI learns from your correction
- Future similar transactions are more likely to be categorized correctly
- Your financial metrics update to reflect the change

## Bulk categorization

For multiple similar transactions:

1. Go to [Transactions](https://app.midday.ai/transactions)
2. Use filters to find the transactions (e.g., filter by merchant name)
3. Select multiple transactions using checkboxes
4. Choose **Categorize** from the bulk actions menu
5. Select the category to apply
6. Confirm

This is useful for:
- Fixing multiple miscategorized transactions at once
- Categorizing a backlog of transactions
- Applying consistent categories to recurring expenses

## How the AI learns

### Merchant patterns

The AI builds patterns based on merchant names:

- "SPOTIFY" → Technology > Software
- "UBER" → Travel & Entertainment > Travel
- "AMAZON" → Depends on your history (could be office supplies, software, etc.)

### Your corrections

When you correct a category:
- That specific merchant pattern is updated
- Similar merchant names benefit from the learning
- The AI weighs your choices higher over time

### Team patterns

The AI learns from your entire team's categorization choices, building a model specific to your business.

## Categories and financial metrics

How you categorize transactions directly affects your reports:

| Metric | Affected by |
|--------|-------------|
| Revenue | Transactions in Revenue categories |
| Burn Rate | All expense categories except excluded ones |
| Profit | Revenue minus expenses |
| Cash Flow | All income and expense categories |

Accurate categorization means accurate metrics.

## Categories and accounting

### Export to CSV

When you [export transactions](/docs/export-transactions-csv), categories are included. Your accountant can map them to their chart of accounts.

### Export to accounting software

If you connect [Xero](/docs/connect-xero), [QuickBooks](/docs/connect-quickbooks), or [Fortnox](/docs/connect-fortnox):

- Categories map to account codes
- You configure the mapping during setup
- Transactions export with the correct account mappings

## Tips for better categorization

### Review regularly

- Check new transactions weekly
- Correct any miscategorized items promptly
- The AI learns faster with quick feedback

### Be consistent

- Use the same category for the same type of expense
- Don't switch between similar categories (pick one)
- Consistency helps both AI learning and your reports

### Use tags for detail

Categories are intentionally broad (for accounting). Use [tags](/docs/use-tags) for additional detail:

- Project names
- Client names
- Tax deduction status
- Department codes

### Handle ambiguous merchants

Some merchants (like Amazon) could be many categories:

- Office supplies
- Software
- Equipment
- Personal (shouldn't be here!)

Correct these carefully. The AI will learn that Amazon transactions from your account might be different from another business.

## Common questions

### Can I create custom categories?

Midday uses a standard category set that maps to accounting charts of accounts. This ensures consistency for exports and integrations. Use tags for custom groupings.

### What if a transaction fits multiple categories?

Choose the primary purpose. For example:
- A laptop is Equipment, not Technology
- Conference travel is Travel, not Marketing

### How do I handle personal transactions?

If a personal transaction accidentally appears:
1. Categorize it appropriately (or use "Other")
2. Consider excluding it from reports
3. Discuss with your accountant for proper handling

### Why did the AI categorize this wrong?

Common reasons:
- New merchant the AI hasn't seen
- Ambiguous merchant name
- Similar merchant to one you categorized differently

Correct it once, and the AI will learn.

[Full category reference →](/docs/categories-reference)
[How categories affect metrics →](/docs/understanding-metrics)
