It then downloads the package from that repository. Then when you try to install any package, APT checks the package name in its database, finds it and checks the name of the repository from where it got it.
When you add software sources, you need to do an apt-get update so that your system APT's database is updated with all the packages on the repositories listed in the software sources lists. This happens when you try to install a package about which APT does not have any idea.
