An Addon Domain is a cPanel based server feature which allows you hosting many different web sites in the same hosting account.
This have many advantages, you share the account space, bandwidth and resources between all the domains/sites and manage all of them though one cPanel control panel. This simplify the management and cut down costs and resources.
When you create an addon domain through your cPanel, the system ask you for your new domain name and based on it the system create a subdomain and a directory, then you simply upload your website files into that directory and thats it! When someone type your domain it load the corresponding web site you from the files you have uploaded in the directory.
Also, once you create the addon domain you can create FTP accounts restricted to the addon domain directory, this let you the option to have different administrators access for each domain and also you can create email accounts based in the addon domain name, and everything managed from the same cPanel.
Please note this is not a subdomain as many clients ask us. You can have different domain names (mydomain.com, myotherdomain.net, etc) hosted in the same hosting account, technically each of these domain have they web site files hosted in different directories in the same hosting account.
When a visitor access your addon domains they see each web site as different web sites and domain names.