Item Outlines, or inventory outlines, is a tool which can be enabled in the options menu. With this enabled, all items in your inventory will have a colored outline in the bottom left corner. These outlines refer to the category of items the item will fit into. Certain outlines, such as the toys and tools, have the same outline color. Others, such as trading scale and the pencil, do not fit into any of the categories.
These "categories" are shown below.
Junk: Items which are completely useless. No items in JJX items fit into this category
Material: Items which are useless on their own, but can later be used in crafting recipes
Usable: Items which the player are able to double tap, including Food items and wrapping paper
Toys: Items which can be thrown by tapping the screen with the item in hand, and then recollected
Weapon: Items which can be used to inflict damage upon mobs
Explosive: Items which detonate after a certain amount of time, or after tapped with a torch
Object: Items which can be placed; blocks
Tools: Items which can be used to destroy blocks or till soil
Equip: Items which can be equipped or worn
Fancy: Worn items which do not grant the player any stat increases
Treasures: Items which are useless on their own, but are valued as collectibles
Other: Items which do not fit into the above categories; Utility items