Kup you are correct. It controls the volume of the current process. If your making a phone call it controls call volume. If your on a main screen it controls ringer volume. If your playing media it controls media volume. In the settings you will find a range of volume controls where you can change each one individually.
Also if your playing music or running gps, really any application, and the phones screen is off it will control that media without waking the phone up.