Audio Coding - 3 (AC-3) is the third digital audio coding technology from Dolby. AC-3 can be used to compress surround sound with 5.1 channels. These channels are left, center, right, left surround, right surround and subwoofer. All channels except the subwoofer have a frequency range from 3 Hz - 20,000 Hz. The subwoofer is only used for low frequencies (3 - 120 Hz). Hence, the 5.1 channels. This channel arrangement is called Dolby Digital (aka Dolby Surround Digital or Dolby Surround AC-3).
AC-3 makes use of perceptual coding to compress the audio. This means that use is made of imperfections of the human ear. What you can not hear doesn't have to be encoded. AC-3 is very flexible in its amount of compression. Typically 384 kbps are used for Dolby Surround Sound and 192 kbps for stereo audio.