the following applies to cd's only (excluding box sets which have their own section for packaging with abnormal sizes) as i've gotten rid of most of my cassettes and vinyl.
first, albums are separated into genres. this can be a bit tricky sometimes, as bands do sometimes release things in different genres. however, i group everything by a band within their main/chief genre. these genres are self-defined by me. within each genre, things are organized a-z by artist/band name. surnames, of course; none of this first name nonsense. i ignore the article "the" as well (the beatles, the thrills, etc.). next, within each artist/band category grouping, the albums are separated into release type: albums, singles, and bootlegs/non-official stuff. within each release type, albums are ordered by release date. and there it is.
i also maintain an excel spreadsheet (updated with each purchase) with information such as year of release, country of origin of band, genre, format (cd, mp3, cassete), and other information.