What it is:
The intonation of a guitar is the disposition of the note intervals along the fretboard. In other words, a guitar has a correct intonation when, once the open strings are in tune, also all the fretted notes along the fretboard are in tune.This adjustment can be made by moving backward or forward the string saddles.
What it does:
Having a guitar with the correct intonation is critical. In fact, playing a guitar perfectly in tune on the open strings but. at the same time, flat and sharp all along the fretboard wouldn’t make much sense: it will be perceived as out of tune.
Setting the correct intonation is not a complicated task: play an open string and bring it to perfect pitch. Now play the same string at the 12th fret: is it in tune? If it’s flat, you’ll need to move the intonation saddle in the direction to the fretboard through the apposite screw; if it’s sharp, to the opposite direction.
More importantly though, you’ll need to take care of the nut slots depth and the neck relief first or, funnily enough, the only two notes in tune on your guitar will be just the open string and the fretted 12th!