Here's the specific process, from Google Help:
* A user clicks your AdWords ad.
* Googleadservices.com server places a temporary cookie on the user's computer.
* If the user reaches one of your designated conversion confirmation request pages, his/her computer passes back the cookie and requests that Google's server send the conversion tracking text.
* Google records the conversion event and correlates it with your campaign, ad group, URL and keyword.
* At the next report update, you will see conversion statistics from the campaign level down to the keyword level.