A collection in LabelEd can be thought of as a category. Items can be assigned to one or more collections for you own organisation, and for use on the front end of your site, for specific assignments such as adding a news article to a ticker, or for browsing through product categories.
When and where collections are used as part of the structure of your site will depend on your specific configuration, so if you're having any difficulty please don't hesitate to contact support.