The payment status shows whether the customer paid for the order or not.
If you have a payment gateway such as Braintree or Paylane, the payment status will automatically change to Paid after the customers pays for the order.
For other forms of payment, eg. bank transfer, you can manually change the status from unpaid to paid by clicking on 'Mark as paid'.
Once you change your status to Paid, you can not cancel this action. You can make a refund for paid orders. Learn more.