Subdomain is a pointer you can use to point to different section in your website, it can be use to shorten a long URL to a section of your website for easier to remember, for example :-
Instead of using long url http://www.mylibrary.com/storybook/horror/ for your site visitor to navigate to the section of your website, you can setup a subdomain http://horror.mylibrary.com to point to the subfolder horror, this shorter URL is much easier to remember much more user friendly.
Subdomain is a good way to organize content sections within a large website, and large content website like about.com uses subdomains extensively in their website.
The cpanel process of setting up subdomain is quite straight forward, it creates a subfolder within the root path public_html, you can create more subfolder in the subdomain root path too, but you can not create subdomain within subdomain.
When to use subdomain ?
Subdomain is mostly used to organize large content sites, you can view a large website as a library and sections as subdomains, racks as the subfolder within the subdomain root path. A good website organization can help web site visitors to find the information easily.
While subdomain can be setup to point to a subfolder within a web site root path, it can also be setup to point to another IP address, that means it can be setup to point to another web server, this setup is a way to use for distributing server load.