WIllis covered the basic concept well. Beyond that, well it could take a book. As a matter of fact, there are 2 or 3 out there already. With DCC there are many choices that you can make. All DCC systems with inter-operate (THANKS NMRA!). They consist of the following components:
1) Control system
2) Cabs
3) Decoders
4) Accessories
Most layouts will use one control system. You then need one cab for each "engineer" or train you will be running. Finally, you need one decoder installed in each locomotive. This is the most confusing part, since there are so many variations among decoders. If you have current production locos, most are, as Willis said "DCC ready". This means that the manufacturer has taken the time to design the loco so that it is easy to install a DCC decoder. This may be by including a the DC control circuit that can be replaced by a "drop-in" decoder", or by installing an NMRA standard jack so you can just remove the factory jumper and insert the plug in the decoders connector. Where it gets confusing is in choosing "functions". Its fairly easy for steam and early diesels, they just have headlights to control. But modern diesels have all sorts of things like rotating beacons, ditch lights, strobes, etc.
In older model locos, you have to do some extra work. First you need to determine if the motor is insulated from the chassis, some are, some aren't. If it isn't, you have to modify the loco so that it is. From there, it’s a matter of choosing a decoder and following the installation directions: wiring the motor, power pickups, and lights.
Hope this helps. If you have questions about a specific loco, just ask. Either I or one of the other forum members will have the answer for you.
Kevin