Drupal handles text using filters and input formats.
An input format is an ordered collection of filters. Any text that is being displayed to the browser should be run through the filters in an input format first. The input format then applies all of the filters, in the right order, so that one filter feeds its output to the next, forming a chain. This chaining of filters can be the source of great flexibility as well as great confusion. The flexibility comes from the fact that filters can be made to work together, the confusion comes from the case where filters inadvertently work against each other, one filter undoing the work of the previous filter.
Drupal captures input in its raw form, saving whatever gets submitted straight to the database without alteration. Then, before displaying any such content in the browser, Drupal processes the text by choosing an input format to apply. Why doesn't Drupal apply the filters in an input format before saving input into the database? The answer is simple; flexibility. Changing the text a user has input before saving it in the database, would make it impossible to get back to the original state. A site administrator could never change the configuration of the filters. By filtering on output, not on input, Drupal gives the site administrator the option of changing how content is displayed at any time.