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In OS CCK
you may work with anything.
If you create Restaurant site, you may create so entities: Table, Personal, Meal, Event ...
If you create RealEstate site, you may create so entities: house, room, agent, broker company, ...
If you create BookLibrary site, you may create so entities: Book, Author, ...
If you create Doctor site, you may create so entities: Doctor, appoint, cabinet ...
If you create sport club, you may create so entities: Team member, Event, Fun ...
Entity - is anything what about your site, which you will have very many on site. Every entity have self fields and forms(layouts)
You also may create Category as entity.
If I have multiple categories, can I have different [Add Instance] layouts for different categories?
Please check you may create common category - for all Entities, and Category for some exactly Entity (as example for house)
For every Entity - you create self [Add Instance] layout, But you may create many [Add Instance] for one Entity.
But which "[Add Instance] layouts" show you may define by Joomla User group, Different users will see different layout
or for every new category you attache self [Add Instance] layouts and for show every category use self menu or self module