Magento Code Pool

codePool is a tag which you have to specify when registering new module in app/etc/modules/Company_Module.xml
There are 3 codePools in Magento: core, community and local, which are resided at app/code/ directory.
Core codePool is used by Magento core team, Community is generally used by 3rd party extensions and Local codePool should be used for in-hour module development and overriding of core and community modules for custom requirement.
So in short, codePool helps Magento to locate module inside app/code/ for processing.

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