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In a nutshell, this removes the 'Public' permission on all of your past posts, from status updates to uploaded photos, and replaces it with 'Friends' so that only your friends can see those posts, and not everyone whether they have their own Facebook account or not.
Remember: any posts which have friends tagged in them, will be made available to that person's friends, as well.
2. To run this feature, click Limit Old Posts.
Remember: this cannot be undone once you have clicked Confirm.
3. If you are sure you want to go ahead, click the Confirm button.
Once Facebook has changed the permissions on all of your old posts, it will tell confirm that the changes have been made.
4. Click Close to dismiss this box, and return to the privacy settings.