Versioning enables you to store, track, and restore items in a list and files in a library as they are changed.
When versions are tracked for lists or libraries, revisions to the items or files and their properties are stored. This enables you to better manage content as it is revised and even to restore a previous version — for example, if you make a mistake in the current version. Versioning is especially helpful when several people work together on projects, or when information goes through several stages of development and review.
Versioning is available for list items in all default list types — including calendars, issue tracking lists, and custom lists — and for all file types that can be stored in libraries — including Web Part Pages.
Excerpt from http://office.microsoft.com/en-us/windows-sharepoint-services-help/introduction-to-versioning-HA010021576.aspx
