I am confused with Picasa's collection 'album'. I sort my photos with folders within 'My Images' in my computer, and every time I have taken photos from a function, I put the photos into a new folder. If so, how is the album function useful to me?

Albums are for organising your photos into things like "Holidays", "Jane's Wedding" or "Camping". To add photos to an album, go into the album and upload from there

If I didn't get you wrong, albums are like tagging? Sort alike photos in various folders into an album?

Yes, sort of. An album in Picasa is like a photo album in real life.

> If I didn't get you wrong, albums are like tagging?

Yes and no.

Picasa's tagging (or "keyword") interface can be accessed with Ctrl+k for adding/editing tags. You use the search bar for tag queries.
As tags are embedded in your photos as IPTC metadata they are preserved when moving pictures from one location to another. However, this also means that adding tags to multiple pictures at once takes time and processing power.

Albums on the other hand are comparable to Flickr sets, and meant to quickly organize batches of pictures. One picture can be included in multiple albums. Drawback: albums are Picasa specific (no IPTC embedding), so you might break them when moving your pictures, renaming folders, etc.