A bong's purpose is two fold
In theory, there is a vacuum created in the bong chamber by sealing one end with your mouth and the other with the bowl of the bong, which contains the entirely legal tobacco substance that you are smoking with it. However, this is not the case. As any smoker will tell you, you do in fact get a large amount of smoke in your lungs in the process of taking the hit, before the bowl is removed and you empty the chamber. After all, you have to be drawing the smoke from somewhere, and that means that no matter how hard you try, air comes in through the bowl when you suck. However, if the bowl is well packed, you will draw a far greater quantity of smoke than air. Those who do not fully pack their bowl do not deserve to be getting high anyway, as they are not experiencing the true effect of the bong, so maybe there are some Darwinian forces at work here. For a bong that produces a greater vacuum, see gravity bong. They aren't nearly as much fun though.
As the smoke is drawn from the bowl through the water, there are very few carcinogens removed, and the tar is mostly intact as well. A cotton filter is far more effective at removing some of the tar - just look at a cigarette filter when you're done smoking one. However, particulate matter - the ash of the burned, entirely legal tobacco substance - remains in the water, due to a combination of the water and, of course, gravity. This makes the smoke more palatable, and removes a lot of the pain from a hit. This makes the smoke healthier than from your average pipe, and who wants all of that nasty stuff in your lungs anyway?
The greater impact of the water, however, comes from the smoke temperature, which is lowered greatly as it travels through whatever liquid you have chosen to put in your bong. As well as the water cooling the smoke, most of the smoke sits in the smoke chamber for a while as you fill it, thus cooling it even more. The bigger the water chamber, the greater the cooling effect, up to a certain point; smoking out of a fish tank does not cool the water much more than a good sized water chamber.
Other random bong-related information:
The mouthpiece of the bong is usually made out of whatever material the bong is cast in. However, many plastic bongs, and some glass ones, have plastic pieces that fit over the top edge of the bong, and keep your lips from coming into contact with the bong. Health fanatics will replace these, sometimes before every session, but to most people, they are a permanent fixture.
Much of why smokers love bongs is because of the pure taste you get. Thus, purists stand by their glass bongs. Glass does not flavor the entirely legal tobacco substance, and makes it taste quite delicious. For the greatest effect, you must use a glass bowl as well.
Many smokers experiment with the liquid inside the water chamber. Either out of desperation (oh no! We don't have any water! "Here, have my beer."), or curiosity. I have not found another liquid that tastes very good, but cranberry juice makes for an interesting, and somewhat pleasant flavor.
Bongs are also often referred to as a binger, or a tube.
Now quit reading this, and go get blazed.