What does Restore Iphone Mean?

I am trying to reset my Iphone to how it was when i originally got it. First i went to back-up all my information, music, movies, apps, etc. Once it finished in the subsection "Summary" next to "Check for updates" the option on "Reset Iphone". If I press that will it delete all my data off the phone but not take away the back-up information on my PC? If it doesn't what does it do? Thanks in advance.

Added (1). Okay, so where do I go if I want to re-set it to factory settings?

Added (2). IMPORTANT! Will I lose my contacts?! How could I back them up?

Reset means your baisically getting a new hardrive. Restore is everything is kept the same

It should take it back to the original settings. And no it won't delete what is backed up on the computer so you should be able to put it back. Hope so.