In Short

Documents in the Cloud are what Apple calls your files stored in iCloud. Each app has it's own iCloud container and can store almost any kind of file there. Once stored, those files are pushed up to Apple's servers, then propagated across any other Apple devices, iPhone, iPad, or Mac, that are logged into your same iCloud account. The advantage is, if you work on multiple devices, you can start a document on one and continue it on another without any problem. The disadvantage is, Apple "locks" files to the app that created so you can only find a file again by returning to the original app you used to make it.

Documents in the Cloud are what Apple calls your files stored in iCloud. Each app has it's own iCloud container and can store almost any kind of file there. Once stored, those files are pushed up to Apple's servers, then propagated across any other Apple devices, iPhone, iPad, or Mac, that are logged into your same iCloud account. The advantage is, if you work on multiple devices, you can start a document on one and continue it on another without any problem. The disadvantage is, Apple "locks" files to the app that created so you can only find a file again by returning to the original app you used to make it.

While Documents in the Cloud had some hiccups at launch it's been working reliably and solidly since iOS 6 and OS X Mountain Lion. With iOS 7 and OS X Mavericks Documents in the Cloud created by Apple's own Numbers, Pages, or Keynote can also be accessed and edited via iWork on iCloud via iCloud.com.