Air conditioners cool your Home or Business by moving heat from inside to the outside. Split Systems do it all through the indoor unit, whilst Ducted Air Conditioners use a return air system.
Installed in the indoor unit or return air system is an evaporator coil. This coil is connected by copper tubing to the external unit. The refrigerant is then pumped from the condenser to the evaporator coil. As this cold refrigerant passes through the evaporator coil, warm air from inside your home passes over the outside of the coil. Because the refrigerant is cooler than the warm air, the refrigerant absorbs heat, therefore cooling the air. This refrigerant is then circulated back outside to the condenser unit.
When this warmed refrigerant reaches the condenser unit it is compressed by the compressor. This compression causes the refrigerant to boil. This boiling causes it to release the heat it picked up from inside your home into the outside air.
The refrigerant is then passed through the coil in the condenser unit where it gets cooled again and is once again ready to go back inside to pick up more heat from your home. So the whole cycle starts again.
As this whole process is going on, the temperature and relative humidity in your premises are both lowered. The relative humidity level drops because cooler air cannot hold as much moisture. As the air cools, it gives up some moisture and it gets collected in the base of the evaporator coil and is then drained away.