Padding an image is adding blank space around the main image to "move" it around, or something like that.
I'm horrible at explaining it but use this as an example.

This is an image I want to "pad":


I want to "move" it to the left so it matches up with something in particular in a theme.
I take the image and add a bit of blank space to the right to "move" it to the left a bit:


After I finish with "padding" and applying Alpha to make the black around it transparent, the image is "moved" like so:


If you look at the first post's image then the third, you can see that padding the folder moves it to the left a bit to line up with the thumbnails.
Hope this explains a bit :D