I dont understand what does the word "decoupling" mean? Where and Why it is used? Can anyone give me a brief idea>?
Quite simply put, it's a little reservoir of energy for a chip or other device to dip into when it needs to get a little extra power.
In Electronics nothing happens instantly. When a chip needs more power it has to get it from the power source. The power source then has to respond to that by providing more energy, and that then has to make its way down the wires or traces to where it needs to be.
By placing a small capacitor near where the power is consumed the capacitor can respond to that call for more power much faster than the power supply.
Every time a logic circuit switches from a 0 to a 1 or a 1 to a 0, the 1 and 0 transistors are on at the same time for a short period of time. In MOS circuits, this is combined with the need to charge the gate of the 1 or 0 transistor (Charge is what capacitors store, gates of MOS transistors are capacitors!).
Since all wiring is inductive, the faster the current, the higher the impedance from the main power supply and the switching device (Your processor or sensor etc). The terms bypass and decoupling mean the same thing: You are providing a local charge well to supply fast current demands by bypassing the main power system, i.e. supplying current via a different path and thus decoupling the switching device from the inductively isolated main supply.
This is also why we used to use two types of capacitors for decoupling: A 0.1uF ceramic and a 1uF electrolytic for instance... You couldn't get the whole 1uF in a low resistance ceramic to cover both the Low and High speed transients without paying a lot so you used two or more parts, each covering a portion of the spectrum. Nowadays a single SMT ceramic with low ESR, low ESL and no lead wires can do the whole job and is usually pretty economical.
Another factor is radiation: A ringing voltage transient current through inductive wiring acts just like an antenna.