Transcoding means taking a file (audio or video) and encoding it into another format. For instance, if you import an .avi file into Encore, it will need to be transcoded to MPEG-2 for the DVD, since DVDs do not use .avi video.
Using the default settings in Encore, audio is automatically transcoded to Dolby AC-3 format.
If you edit in Premiere and then use Adobe Media Encoder to export to the "MPEG-2 for DVD" format, you will get two files, an .m2v video clip and a .wav audio clip (called "PCM" in AME setings).
Import these as Assets into Encore and the video should show "Do not transcode", because it is already the correct MPEG-2 format ready for DVD, while the .wav audio will say "Untranscoded", since the default audio setting in Encore is Dolby AC-3. Therefore, when building the disc, the uncompressed .wav audio will be converted (transcoded) to AC-3, and the video will be used "as is".