^index\.php$ - [L] prevents requests for index.php from being rewritten, to avoid an unnecessary file system check. If the request is for index.php the directive does nothing - and stops processing rules [L].
This block is all one rule, and it says that if it is not a real file and not a real directory, reroute the request to index.php.
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /index.php [L]
index.php itself interprets the URL that was requested by the client (PHP can see the requested URL using $_SERVER['REQUEST_URI']) and it calls the correct code for rendering the page the user requested.