Files are documents you can add to your knowledgebase. The type of files you can add is controlled by the settings of your knowledgebase, but in general you can add graphics, text documents, Microsoft Office documents (Word, Excel, PowerPoint) or PDFs.
The file area is separate to the article knowledgebase, although you can attach the files from the File area into articles. Note though, that inserting graphics into articles is not the same as adding a file from the Files area.
Why would you want to have a separate files area? Common examples might be:
The maximum size of a file you can upload depends on PHP settings, default is 2MB.