Asphalt deteriorates over time, this is accellerated with neglect and/or poor maintenance and oddly enough infrequent traffic. Over time the asphalt will begin to crack, which creates openings for water to infiltrate the substrate and sub-surface of the asphalt. Water freeze expansion and erosion will cause the asphalt to crack even more creating holes and large gaps in the sub-surface layer. The longer this goes without prevention "alligator" cracks can develop or even more severly large chunks of the asphalt layer can break away creating potholes.
Pothole patching is an easy cost effective way to repair an area where a pothole has formed but the surrounding asphalt is intact and viable. A small surrounding area of the pothole is cut away and new asphalt, or what is called a patch, is put in the void. The patch is compressed using a vibration roller or compacter and the edges sealed with hot crack filler to prevent water infiltration in the future. During the colder months a temporary "cold patch" may be put in place until the issue can be addressed when the weather permits.
When a larger area of the asphalt surface is damaged then the best course is often removal and replacement. Essentially the damaged area is removed and cleaned. The asphalt mix is then layed and rolled level. The edges are sealed with crack filler to prevent water from infiltrating the area in the future. Typically the repair will not even be noticeable the next time the parking lot or traffic area is sealed.