Without more specific information, this is a difficult question to answer. Extracting a file refers to the process of taking it out of a compressed format (*.zip, *.rar, *.tar, etc.) and placing it in a new folder by itself (or, more likely, as a group of files).
For example, the terminal command
tar -xvf filename.tar
would unpack/extract the file "filename.tar"
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well I assume you are talking about .rar and .zip files as they are most common. when you compress a file in the first place you are changing its data to be smaller so a piece of original data may look like "01" and the program would compress this to "a" so its smaller, so extraction is the opposite the program would read "a" and know that that actualy means "01" and restores the file to its original state.
this can also be known as encryption